TL;DR:
- Make a plan! Do your research and have an idea of what your investing goals are and how you’re going to get there.
- Look at business trends on a macro level. Global trends can have a major impact on a stocks performance.
- Be aware of the company mission, values and leadership.
- Talk to your friends, or people in the Public community, and share your thoughts on stocks and investment strategies.
So, you’ve decided you are going to invest in the stock market. The big question remains – how do you pick your stocks?
Value investing, income investing, and socially responsible investing are just three of many investment strategies out there. With so much information scattered across the web and your money on the line, it can feel daunting to pick stocks. There are a variety of factors to consider before deciding on the right stocks for you, this article will go over some of the more common practices investors employ to pick the winning stocks that comprise their portfolios.
Have an Investment Strategy
When it comes to investing there is no one size fits all. Investing is unique to you to your financial situation and goals. As a result, there are many different types of investors out there. Especially when first dipping your toes in the stock market, it helps to understand popular investment strategies and styles. Just remember, there is no “one way” to select stocks.
Value investing is a term often associated with the illustrious investor Warren Buffet. Simply put; value investing involves picking stocks that trade (at time of buy) for less than their value. Value investors then sell their stocks when these stocks come into their real value. And they aim to make their profit from the value appreciation difference.
Another commonly employed method, income investing, involves a long term strategy that relies on buying low-risk securities such as dividend-paying stocks, exchange-traded funds (ETFs) as well as bonds and mutual funds. An income investor will opt for fixed income investments with minimal risk exposure. Most investors incorporate income investing into their broader strategy even if they prefer higher risk portfolios. When it comes to income investing you are in it for the long haul. You know what they say- good things come to those who wait.
Socially responsible investing is an investing method in which investors build portfolios composed of environmental and socially responsible companies.
No matter the type of investor you are, it helps to start by looking at a company’s financial performance.
Financial Performance
Analyzing a company’s financial statements and performance is a great way to better understand the function of a company. Familiarization with a companys financial performance also provides insight into a companys stability and potentially even the value of their stocks. Some foundational documents that reflect a companys financial performance might include the company’s balance sheet, cash flow documents, and income statements.
Apropos financial performance, the price-earnings ratio (often called P/E ratio) is a favored investors tool. The P/E ratio measures the price of a share against the earnings per share. So, at a first glance high P/E ratio might indicate that investors expect high earnings, however stocks can be overvalued. If you are interested in value investing you might want to find a company with a lower P/E ratio, a company whose stocks are potentially undervalued. This is all to say – financial tools like the P/E ratio are relative tools, so the ratio will be most insightful when comparing to related companies and stocks. Other helpful metrics of a companys underlying financial health include cash reserves and profitability (all of which you can find in the app). And, while reviewing a companys financial performance – remember that performance alludes to the current health of a company but does not necessarily paint the picture for what could come next.
Business Trends
When thinking about stocks, it is helpful to zoom out and consider the business landscape. For example, in the age of COVID19 companies with products that enable or improve remote employee connectivity have experienced growth. Another trend from 2020 is the increase in DIY culture. Companies like Etsy, Pinterest, or even Amazon are connected to these macro-level behavioral preferences and their stock value can shift accordingly.
Product, Added Value, and Innovation
Looking at the viability and innovation of a company can be a tremendous asset for an investor. On the company product level: the myriad ways in which companies meet their customers’ demands and add value impact the growth, earnings, and success of the company and by extension its stocks. The added value and innovation of a company often determines the success of the company in the long term. In fact, ample market literature focuses on the role of innovation in driving market gains.
Company Mission and Values
Circling back to socially responsible investing as an investment strategy. It is becoming increasingly common practice for investors to invest in companies whose missions align with their own. Being an informed investor might mean familiarizing oneself with a companys social impact, environmental factors, and diversity of leadership.
A prevalent tool used to evaluate a companys social impact (positive or negative) is called an ESG report or rating. This is a third-party providers assessment of a companys environmental, social, and governance (ESG) performance as related to financial performance. An ESG rating has a twofold benefit system. The rating gives investors insight into the social and environmental practices of said company. Additionally, an ESG rating will quantify (in relative terms) exposure to financial risks (primarily litigious and operational) associated with company practices. If you are interested in an individual stock, or ETFs ESG rating check out the Yahoo Finance Sustainability Scores (provided by Sustainalytics ESG Risk Ratings).
A great place to start looking for socially responsible oriented investments is the Do the Right Thing and Combat Carbon themes on Public. These investment themes streamline public companies with high ESG ratings and socially impactful products and values. For companies leading in diversity of leadership, we recommend perusing through the Growing Diversity investment theme. This list features companies that set the bar for diversity and inclusion in senior leadership as well as overall company makeup.
Leadership
And speaking of senior leadership, leadership is yet another meaningful component to consider before deciding whether to buy a stock. Leaders create the environment that determines whether their team and by extension company succeeds. When you invest in a company you become a shareholder in that company. It is imperative to know who the other shareholders are. Who is making decisions? Do you believe in their abilities? Check out a companys executive leadership page or board members information to round out your research. Know who you are investing in.
Conversation and Community
Lastly, and perhaps closer to home. Initiate conversations with your social circle. Run ideas by your friends and family. Everyone is a subject matter expert in their domain. And it is only through conversation and dialogue that we can access and capture everything the stock market has to offer. Knowledge is wealth. Conversation is capital.
A lot goes into picking the right stocks for you. Informed investing means covering your bases, and it means investing passionately. To meet and learn from other informed investors sign up for Public.