Four Considerations When Selecting Stocks to Invest In
There’s no particular approach to picking the best stocks for your investment portfolio. It’s dependent on numerous factors. Discussed below is how to pick stocks to invest in.
1. Determine a stock’s intrinsic value
A stock’s intrinsic value represents its actual worth. Unlike a stock’s market price, which can change due to external factors and sentiment, intrinsic value shows a company’s core value. Understanding intrinsic value is key in determining whether a stock is fairly priced, overvalued, or undervalued. Comparing a stock’s market value to its intrinsic value can help you spot investment opportunities. Knowing a stock’s intrinsic value offers numerous benefits, including:
- Risk management: Stock investments made based on intrinsic value help mitigate risk by ensuring you invest based on robust financial fundamentals and not market hype or speculation
- Informed decision-making: Understanding intrinsic value allows you to determine whether a stock is overvalued or undervalued, which helps you decide if it’s worth investing
Nonetheless, determining a stock’s intrinsic value isn’t easy. Fortunately, you can automatically calculate this metric on alphaspread.com or any other stock analysis platform to identify the most undervalued stocks to maximize your investment.
2. Perform stock screening
Stock screening involves looking for organizations that meet specific financial criteria to identify the stocks worth investing in. It concentrates on tangible variables like:
- Revenue
- Market capitalization
- Profit margins
- Volatility
- Performance ratios such as debt-to-equity ratios or P/E (price-to-earnings) ratio
The process allows you to use stock screeners to sort through the many options available on global stock exchanges. Using these tools requires you to respond to several questions, including:
- Whether you prefer small-cap or large-cap stocks
- Which P/E ratio range is acceptable to you
- Whether you’re searching for stocks in a specific industry
A good stock screener lets you search using any of your preferred metrics. Once you’re done inputting your responses, you receive a list of stocks that align with your requirements.
3. Read stock charts
Stock charts are a visual representation of trading volume and share price changes. These investing tools allow you to see:
- A stock’s past performance
- Moving averages
- The highs and lows
- Trading volume
- Trends and more
Learning how to read stock charts equips you with the skills to quickly realize when stocks are being heavily sold or bought, enabling you to identify the best stocks to invest in.
4. Determine your risk tolerance
Determining your risk tolerance (the amount of loss you’re ready to suffer) is key to identifying the right stocks and developing a successful investment strategy. Stocks with potentially high returns come with significant risk. If you cannot handle the possibility of losing your principal, opt for low-risk stocks with low returns. Risk tolerance isn’t the same for everyone. However, the following factors can help you determine your risk tolerance:
- Investment goals: Knowing your investment objectives enables you to determine the amount of time you need to grow your money and the amount of risk you can handle with the stocks you pick
- Your comfort level: Different investors handle risks differently. So, determine how comfortable you are when taking risks
- Portfolio size: Large portfolios are more risk-tolerant
Endnote
While selecting the right stocks is crucial for your success as an investor, it isn’t easy. However, determining intrinsic value, performing stock screening, reading stock charts, and determining your risk tolerance can help you pick the best stocks to invest in.