How to Pick Stocks: Beginners Guide for New Investors
In these times of financial uncertainties, it is important to learn about different methods of investment. If you want to build a financial corpus for your future self, try investing in stocks. In this article, we will be focusing on investment in stocks.
Table of Contents
There are a number of methods of investment. These include mutual funds, SIP, fixed deposits, etc. Stock or equity is a type of security that represents a percentage of your share within the organization. You will be entitled to the company’s assets based on the proportion of stocks you own. Investors trade in stocks on exchange markets. Government authorities regulate these markets.
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How Do Stocks Work?
Organizations issue their stocks to raise capital for the business. Once you buy a stock of that company, you are becoming one of the owners of that company as per the cost of your stock. Suppose, the company is worth 10,000 rupees. Each stock costs 100 rupees and you have bought 1 stock.
This means that you have 1% of ownership in that company. Now, you have a claim on 1% of that company’s assets and earnings. Once you own a stock, you have the right to vote in the shareholder’s meetings. You will receive dividends when the company distributes them and you can also sell your shares.
You are also entitled to the company’s profit according to your shareholding. Your share in the profit will increase if you have more shares. Certain companies reinvest dividend yield in the company rather than paying out dividends.
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Investing in Stocks
Let us now try to understand how you can invest in stocks even when you have no knowledge.
1. Understand Your Investment Approach
Before investing in stocks, you need to understand yourself as an investor. You should identify your investment goals, risk tolerance and risk capacity. These factors will determine the type, time and number of stocks that you want you to invest in.
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2. Manage your funds
The stock market is volatile in nature. While investing the money in the stock market, ensure that you have sufficient funds for yourself apart from investment funds. You may also have to keep the funds invested for the long term. It is important to prioritize funds allotment accordingly.
3. Opening an Account
This is an important step for those who have started investing in the stock market. You will have to open a brokerage account that you can easily open with a broker. Always choose a broker that offers support services like chat functions to answer stock related queries.
You should also consider the brokerage charges while opening the account. To open a brokerage account, you will have to submit digital signatures, e-verification and a bank account that you want to link.
4. Appropriate Percentage to Allocate in Stocks
While investing in the stock market, ensure that you would not be needing these funds in the coming five years. This is the concept of asset allocation. The most important factor is age. The thumb rule is to subtract your age from 110.
Suppose, you are 30 years old, then as per the rule, subtract 30 from 110. Now, you will invest 80% in the stocks while 20% will go into fixed income. You can change this proportion based on risk tolerance and work plans in future.
5. Choosing stocks
Once you have set up a brokerage account, you need to find out the right set of stocks to invest in. To find the most suitable stocks, you should consider the following:
- Avoid penny stock (stocks that cost less than $5) because usually the companies are just evolving and need time for showcasing their worth.
- Diversify your portfolio with stocks from different industries. This will average out the risk associated with one company.
- Try investing in businesses that you understand. This will allow you to read stocks better.
- Avoid investing in highly volatile stocks since new investors have less knowledge of market movement. It is always better to start your investment journey with less volatile stocks.
Stocks can give high returns on investments but they always come with the risk of highs and lows. It is essential to learn the fundamentals of the stock market before diving into this domain of investment.
How To Pick Stocks?
You can pick stocks by following the below-mentioned steps:
- Decide your financial goals and how much risk you can handle.
- Understand the current economy's health by looking at GDP growth, inflation, and interest rates.
- Choose sectors that are expected to do well based on the economic outlook.
- Perform company analysis either through one or more ways:
- Fundamental Analysis: Check the company’s financial health by looking at earnings, profits, and debt.
- Technical Analysis: Study past stock price movements to predict future trends.
- Qualitative Analysis: Evaluate the company’s business model, management quality, and market position.
- Perform stock valuation to determine if the stock is priced right by comparing it to its historical prices and industry standards using ratios like P/E (Price-to-Earnings) and P/B (Price-to-Book)
- Identify potential risks related to the stock or its industry.
- Diversify investments across various sectors to reduce risk.
- Keep an eye on your stocks and the market to make sure they still meet your goals.
- Consider using stock analysis tools, reports, and financial advice for better decisions.
FAQs
What are the different types of stocks?
There are mainly two types of stocks including common and preferred stocks. Common stockholders can receive dividends and vote in the shareholder meetings. Preferred shareholders only have limited or no voting rights. They receive higher dividend payouts. During liquidation, they have a greater claim on company assets than common stockholders.
Who buys your stocks when you sell them?
Any trader can buy your stock. Be it an institution, corporates, individuals or market makers who are trading in the market.
What happens if there is no buyer for the stock?
For such thinly traded stocks, you will have to hold your stock until there is a buyer available.
How important is market timing when picking stocks?
While market timing can enhance returns, it's difficult to predict market highs and lows consistently. A long-term investment approach focusing on sound stock selection based on strong fundamentals is often more effective.
Should I diversify my stock portfolio?
Yes, diversification is key to managing risk. It involves spreading your investments throughout different sectors to reduce the impact of poor performance in any single area.
Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio
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