So you want to buy some investments? You hear that investing is a good idea? So how are you going to invest?
If you want to see this article in video form instead, here it is:
Maybe you just pick a name out of a hat – you go in here and pick a name and like Berkshire Hathaway. Or maybe some Tesla! Or Apple, or Coca-Cola or Proctor & Gamble.
Maybe you’re looking online and you see you see headlines like this one I found: “Four of the Cheapest Stocks to Buy Right Now”. Sounds good because you always want to buy low and sell high, right? Or what about this one: “One Dividend Aristocrat Set to Soar and One You Should Ignore”. Okay – I want the one that will soar, right? I don’t want to have the one that I should ignore. So maybe I should buy that one that’s gonna soar. (By the way, a dividend aristocrat is a company that pays dividends pretty regularly and is a very stable company so you can count on. That’s kind of what they’re supposed to be at least, because you never know for sure.) What about this headline: “This Stock Could be One of the Biggest Winners in a Post-Pandemic World.” Sounds good, right, because we all know pandemic is going to end sooner or later.
So is this what you’re going to do? Follow advice you see online about stocks you need to buy and get into? Or are you going to do a little bit of research first? Or are you not going to buy stocks at all? It’s up to you of course. But I did some research and have some tips for you today for how to pick stocks and I’m gonna be going through some of them with you right now.
But I have to tell you even these tips are not everything. They’re just scratching the surface. There’s so much that you should learn! I did a bunch of research and about how to buy a stock and I came up with these tips as some of them and then after I had all these tips together I saw a video on the Learn to Invest YouTube channel called “Eight Steps to Research a Company to Invest In” and they had a whole bunch more tips that were not even on the list that I put together. Like, one of them was to buy a book by people close to Warren Buffet about how he interprets financial statements. Because if you’re gonna really research a stock you need to look into the financial statements from a company. Great tip! And there were many more. So don’t take this list as definitive. It’s just a starting point.
Let’s get into it.
One of the first things you need to realize is that you need to take into account your what you want your portfolio to achieve. Do you want it to grow really quickly? Do you want it to be as stable as possible? Or do you want it to provide retirement income? What about having your investments be as safe as possible? You need to think about what you want your portfolio to achieve and then make sure you buy a stock that falls into that strategy. It’s no good buying a highly volatile penny stock if your investment aim is stability and wealth preservation. So you want a stock that fits.
So you decided that maybe a company would be a good fit for your portfolio. What can you research about this company and it’s stock to see if it’s a worthwhile investment?
One of the more obvious and simple to explain ones is earnings growth. Is the company growing? Plain and simple. Are they making more money every year or not? You don’t want a company that’s not growing or that’s falling behind because in the long run that stock’s not going to do well. And you might want to compare it to its peers as well. Because if it’s growing at 2% per year and all its competitors are doing 12%, that’s a red flag. There may be a reason for it, but there’s more research to be done there.
There’s a couple ratios that you need to understand and here is one of the big ones: the price to earnings ratio, or PE ratio. Basically, you divide the stock price by the earnings per share (EPS) and that’s the ratio. If you don’t have the earnings per share, that’s just how much earnings the whole company made divided by the number of shares issued. So the price to earnings is you divide the stock price by EPS and then you get the price to earnings ratio. You should find the PE ratio for this company (it’s usually provided when you look up a stock with your broker) and compare it to other similar companies in the same industry and see if it’s a good PE ratio or not. Generally, PE ratios falls between 13 and 18. (Though I didn’t see exact consensus on this range in my research.) Anything below that range is considered cheap, and above that range is considered expensive. But you have to realize every industry is slightly different.
Dividends! Does your company pay dividends? Do you even care about dividends? Some people don’t care about dividends. Actually I watched a video explaining why people shouldn’t care so much about dividends. (Because there’s a huge group of people who call themselves dividend investors, who are constantly chasing the best dividend stocks.) When a company pays out dividends its stock price goes down commiserate with how much money it had to spend to pay its shareholders, because that money is no longer in the company and it is worth less. So at the end of the day it doesn’t matter if they pay out dividends or not, but some people really like dividends. And you might be one of them so take a look at a company’s dividend information. The most obvious thing to check is the yield. If a stock has a yield of 3% for example, and you buy $1000 worth of the stock, the company will pay you $30 every year. Another thing to watch for is the payout ratio. This is how much of the company’s earning go to paying dividends. A good ratio is in the 35% to 55% range. There are exceptions to that rule, and you have to know about that too. For example REITs are mandated by the government to give out a large amount of their profits so their payout ratios are going to be much bigger than 35% to 55% and that’s expected. (A REIT is a Real Estate Investment Trust, and a great way to get into real estate without actually buying properties yourself. Do some research into them!)
For the next one on my list I’ll keep it short and sweet. And it’s the company’s management. How well is the company managed? Does it have a good culture? Does it churn through CEO’s, or is it stable?
Next up is a company’s relative strength in its industry. First, is the company in a good industry or is it in a falling industry? For example, I wouldn’t want to be in newspapers right now but internet growth stocks might be a better thing to be into. You need to do that research. So even if the industry is a good one, you need to know if the company is strong within that industry. Just because it’s a good industry doesn’t mean that companies gonna be doing well within that industry. So check to see how well is it doing compared to its peers.
Stability. There’s two kinds of stability. One is the company’s stock price. Does the price vary wildly? Can you handle a wildy eratic stock price or do you want something that tracks the market better? The second kind of stability is in the company itself. This is related to the management of the company. Do lots of employees leave? How long has its CEO been the CEO, and what about the CEO before that? Does it keep changing its product line? Etc.
Let’s look at another ratio. It’s the debt to equity ratio. Generally it should be less than 0.3 and it is exactly what it sounds like: how much debt does the company have versus how much stuff it has. You know that on a personal level if you take on a huge debt that you can’t handle, that’s not a good idea. The same thing goes for a company. And again, you have to watch which industry it’s in because industries have higher ratios than others, just because of the way they’re structured.
So I’ve just given you a whole bunch of little tips about how to look at a stock but there’s more, like I said at the beginning. You need to do more research and to be frank I don’t even know if you should be buying stock and I’ll be getting into that in the next video. But if you do want to buy stock these are some tips for you to watch out for. But don’t take my word for it – I’m just some random guy sharing what I’ve learning. I’m not an expert. So watch out for my next article and video where I talk about the fact that maybe you don’t want to be buying stocks in the first place.