How to Pick Stocks for Beginners
Today is the day we develop the fundamental skill of expanding your portfolio. If you have read our article or watched the video about the “First Stock Everyone Should Buy” you should at least have an ETF. ETFs are the perfect first stock for everyone, but as you build your skills you are ready to expand your portfolio, which is why today we're talking about investing in stocks for beginners. Since you have enhanced your investing skills through these fundamentals series on Wall Street Survivor you will have strategies to build a winning portfolio!
Throughout this article, we will start by sharing key tips and tricks, plus wrap up with the best resources to use to shape your portfolio.
Why You Need an Investing Strategy
I know I know your first thought is why do I need a strategy?
You may think you know which companies are good and bad simply based on the fortune 500… but there is much more to the stock market than that. There are thousands of different companies to invest in and you want to pick the right companies at the right time.
For example, you do not want to end up like, “Craig,” our friend mentioned in previous articles and videos. I think we can all tell “Craig” should be following these investment fundamentals to improve his investing skills and strategies. He was consumed by a popular stock that was experiencing a high trade volume: Luckin’ Coffee.
Without implementing a strategy or doing the appropriate research, Craig invested in Luckin’ Coffee while the security was trading at $40 a share. 1 month later Luckin’ Coffee was trading at $4 a share… This was a loss to Craig’s portfolio since he did not use a consistent investing strategy.
Trying out Your Strategy
Now let’s review the essential steps of trading stocks for beginners, to pick the right stocks.
Step 1. Examine your current financial situation, how much can you invest upfront, and how much can you invest on a recurring basis. As you begin to invest, it is essential to form a strategy that is realistic and maintainable. You do not need a lot to invest, but it is essential to only do what you can afford.
Maybe start with an initial investment of $500 or even $200 and decide to invest $100 or $50 each month on a recurring basis. This is a method we have mentioned in previous videos or articles – dollar-cost averaging. We will have a full video & article dedicated to dollar-cost averaging if you have not checked it out!
Step 2. Set a goal for your investments. What do you want to use this portfolio for? Retirement or a vacation, etc. Setting a time frame helps you understand your risk tolerance when investing. Do you have time to bear a downturn or do you need to invest your money in less volatile securities?
Step 3. Pick a strategy that is suitable and effective for you. Today I will share three processes to picking a stock, and the third one is the secret resource that will help maximize your portfolio gains.
Strategy Number 1: Value Investing
The Warren Buffet approach… invest in the value of a company. Warren Buffet many times has described this as you are investing in a company, not a stock. Quite often people do not picture themselves as business owners when they own stock, according to Warren Buffet this is essential when investing.
Pick businesses (stocks) with a business model and industry that, first, you understand. Then select the company (stock) based on the big picture or long run. What does the value for this company look like in 5 years? So your goal here is to find companies that trade for are trading for less than their value if you want to buy equity or companies that are trading for more than they are worth if you want to short them.
People like Warren Buffet have found that the market will overreact to good or bad news; As long as you do your homework, and focus on companies that will long term success no matter the day to day news arising about their firm the value investing approach can work well for you. Understand why this company has value in the long run, the value investing strategy has proven to help Warren Buffet and many others find success, and it could work for you too.
Strategy Number 2: Growth Investing
Strategy number 2 is known as growth investing. Invest in companies that have high growth opportunities. When we examine growth investing let’s use the example of two lawn mowing business models.
Sue is creating a Roomba for lawn care and John is your traditional landscaper. Currently, Sue only has 5 clients as she tests her new product (the outdoor Roomba). On the other hand, John has 20 clients. This means John is bringing in 4x the revenue. In the short term, John’s company appears to be better, but in the long run, Sue has a competitive advantage allowing her to have lower overhead, and a high capacity of clients she can manage.
So in 1-2 years when Sue masters her outdoor Roomba her business will be worth much more than John’s. This is the basic idea of the growth investing approach. Select the company with the most potential. Which company has the intellectual property or new technology to change the competitive landscape, these are the growth companies you want to look for when using a growth investing strategy.
Last but not least my secret to my investing strategy, is using investing resources.
When investing in the stock market it is important to stay up to date on current events, company info, and the most relevant companies. This is a lot of information to cover all by yourself, so there are resources out there that can alert you about all the information you need to know about the stock market; some can even pick stocks for you.
The Motley Fool has been one of the most successful stock pickers since they were incorporated. Since 2002 when the Motley Fool was founded, they have had an average return of ~530%. If purchase the Motley Fool and invest in their stocks they will basically pay for your subscription and give you more money to put in your pocket.
Now that I broke down three successful investing strategies, it is time to pick one to add stocks to your portfolio. Down in the comments share with me and the other Wall Street Survivors which strategy you are going to use…
- Value investing
- Growth investing
- Stock picking newsletters (like The Motley Fool)
Each of them is a great strategy but each investor tends to have a preference, so decide which one is your favorite and begin investing today! Good luck with all of your investments moving forward!