Choosing individual stocks to invest in can be a daunting task for any investor. There are so many different companies out there, and the decision of which one to choose is often an overwhelming process.
If you have never invested in individual stocks before, or if you're looking for some guidance on how to make your first investment, then this blog post is for you!
What to Consider Before Investing in Individual Stocks
Before you invest in any stocks, it's important to understand a handful of important considerations you should make.
- How much to invest. You'll want to know how much money you want to invest. You should consider this money you won't need for at least five years. It is always a good idea not to overextend yourself financially by investing in the stock market with money you'll need sooner than that timeframe.
- Understand your investing goals. You'll want to know what you are investing for. Are you saving up for retirement? Do you have some funds ready in case of an emergency? It is important that your investment goals line up with your time frame, so don't invest if there is not enough money set aside.
- Consider the risk involved with each investment. Know how much risk each stock has before buying. This is a pivotal step and not something readily known beyond understanding a company's valuation, performance potential and competence of management. A good measure to approximate this risk is through the stock's standard deviation or its Beta measure, meaning how its average returns correlate with the broader market's over a longer period of time.
- Determine how much you are willing to invest in stocks. If you're just starting out, it might be a good idea not to put too much money into the stock market right away - only invest what you are comfortable losing. This way there is less of an emotional attachment if the stock goes south.
- Figure out your risk tolerance. If you are conservative with your investments, it might be a good idea to avoid the more volatile stocks. If you're not too worried about risk, this is a great time to try out some of those less-stable securities for big returns.
How to Research Individual Stocks
Researching a company's financial situation is called fundamental analysis
The first thing you want to do is assess the company's revenue, how much it has grown and what kind of markets they are in.
If one of their main products is a service that relies on people having enough money to buy something expensive like a house or car, then make sure your research takes into account any changes in spending patterns for those types of items - this will help predict if the economy could be cooling down.
It also pays not only to look at quarterly financial reports but annual ones as well. You can find them listed online and often times companies have pages with archive information available so you can see how things were looking way back when!
You'll next want to understand the company's business model to get a sense of its costs.
The profit margin
is a key metric to learn for this analysis. It's the percentage of money made from sales that actually goes to pay for overhead costs and produce profits.
- Profit Margin: The ratio between net income, or earnings after taxes are paid, and revenue earned during an accounting period
. Higher profit margins indicate more companies keep more money from each dollar of sales. More profitable companies have higher profit margins.
A company with a higher profit margin typically has pricing power because it can more easily cover its costs and turn a healthy profit on each sale of goods or services while maintaining prices in line with competitors.
Conversely, companies with lower margins have less pricing power as they must charge consumers a price in line with competitors but have either the inability or a market structure which has higher costs.
You can measure this figure by looking at the income statement. This is a presentment of summary financial transactions during a given period showing how much money was brought into the business versus how much went out through expenses.
You can also look into a company's financial health by looking at its balance sheet. This presents a company's financial situation at one point in time, listing the value of its assets against liabilities.
You can see if a company stands in a good financial position by looking at its debt-to-equity ratio. This is a measurement of how much the company owes to creditors and shareholders versus how much it has in assets like cash, stock, equipment or other owned assets.
How to Find Good Companies
Once you know what to look for in your research, you can begin to sort through companies to find the good ones. You can start with the research and stock analysis apps
, investment research websites
and investment banks to see which ones they recommend. You can also look at new, upcoming stocks by reading sources like Forbes, Fortune or Marketwatch for their latest stock tips.
You may find that looking through company financials is too much work - in this case you might want to go with a brokerage firm that specializes in screening stocks for individual investors.
Where possible, look for firms that trade commission-free and without any hidden fees including annual account charges or maintenance charges on your funds. They should have an easily accessible way of buying shares such as online purchase or phone order.
If you're not sure where to start or what stocks are good investments then one option is investing in index funds through mutual funds and ETFs. These investment companies
invest money in many different stocks across an industry or sector (providing diversification) giving investors broader exposure than investing just in individual company stocks alone.
ETF index fund fees may be lower than mutual fund fees because they don't need to charge fees like 12b-1 fees to market and promote the mutual fund to investors. ETFs trade openly on exchanges
and do not need to pay such fees.
Some Companies to Consider
Index fund investing handles a lot of the heavy lifting for you with a simple purchase or series of purchases. However, if you'd like a chance at better returns, you'll likely need to consider individual stocks.
Some of the best performing companies over the last ten years have been tech stocks. Investors who bought tech company stocks like Apple
, Google, Tesla, Amazon
have performed well over the preceding decade.
You may also want to consider investing in a sector or industry ETF that tracks specific industries like tech. You'll see some of the same companies but you're less likely to have all your eggs in one basket if something should happen with any company.
Risks to Investing in Individual Stocks
But, as said above, there are a few things you'll need to consider before diving in.
1) Have more volatility.
Individual stocks can be volatile which means they will have more ups and downs than an index fund, but also can experience greater long term gains as well. You're betting on the future of one company versus a broader range of companies so it's important not only to do your research before investing but continue doing ongoing research for specific stock selections because if you don't know what's going on behind the scenes there could be trouble ahead.
You may want to put together a checklist of questions you'd ask yourself when researching any particular stock including:
- Does this company cater to my needs? If I'm looking for tech stocks, does this company produce technology that will be the next Facebook?
- Is it a recently-private or has it been public company for a long time? How is its stock history performance?
- How much volatility can I handle for potential gains? If you're not feeling comfortable with more volatile returns then index funds are probably better suited to your needs.
You may also want to consider an age old investment strategy known as dollar cost averaging
to account for volatility in the stock price.
This means investing equal amounts into stocks over time instead of committing all at once which could help smooth out any fluctuations in price so if one month there's a dip in value but an uptick six months later. That way, you'll avoid some losses by being less exposed during those dips and gaining from them too! It helps lower short term risk of timing the market perfectly.
2) Potential to go to zero.
Individual stocks, while rare, can go to zero. This is another downside of investing in stocks. The potential for losing all your money with a single trade or company failure is high, which might be too much risk if you're just starting out.
The upside to individual stocks though, is that they can produce huge returns and the knowledge that owning an entire business gives you - unlike index funds where it's more like buying shares in companies rather than being their actual owner.
On the other hand, index funds can't go to zero. That requires every company in the index being tracked to go out of business, which is highly unlikely.
Investing has always been considered one of the best ways to increase wealth but there are many considerations before taking this step so make sure to do thorough research first!
3) Possibility of underperforming.
Just as individual stocks can outperform a relevant market index, they can also underperform. Meaning, you'd have been better off investing in an index fund because you've not only have earned a higher return, but you'd also have taken less risk to earn the higher return.
How to Raise Money for Investing in Individual Stocks
Now that you've learn a lot about how to find individual stocks and the risks associated with investing in them, you'll need to look into how you can raise the money necessary to invest.
1) Set Aside Savings
If your goal is investing $500 or less at a time, you can probably save up the money needed without much trouble and then use that as a initial deposit on an individual stock purchase.
But more importantly, saving now will give you peace of mind knowing that even with small investments when things go wrong there's enough cash set aside so as not to feel like everything has gone bad. There's no need to stress about having extra cash around just because it might come in later.
By investing in small amounts consistently, you'll also have a better chance of making more money over time.
2) Get a Part-time Job
If you want to invest larger amounts, say $1,000 or more at once for specific stocks that interest you, then a really good way to consider is getting a part-time job. This is a great way to get extra money.
Adding this extra income source can diversify your sources of cash for paying your own expenses as well as continuing to invest in individual stocks.
3) Turn a Hobby into a Money Making Venture
If you have a hobby that can bring in some extra cash, this is an excellent way to use your spare time profitably.
Some examples of hobbies that people like to do for money:
- tutoring or teaching kids how to play instruments
- sewing clothes and selling them at local markets
- taking care of animals at home or house-sitting for people
- making jewelry, knitted goods or other handmade items
- writing blog posts for companies in your field of expertise and getting paid.
The list goes on! Consider how you can use a hobby to make money
so that you can have some cash to invest with the extra money as well.
4) Flipping Things for Profit to Invest
Another great way is to look at things you already have or others are selling to try to flip them for a profit.
This could be anything from a car you want to sell for more than the price in your local classifieds, or clothes that are fashionable and still have their tags on them.
You can even try flipping things online! You'll need an eBay account as well as some patience, but it's often worth it if you're really interested in flipping things for profit
. You may make some decent cash to then invest in individual stocks.