The 5 Rules of Picking The Right Stock

These days, people seem to be keener on investing in ETFs.

As a result, Individual stocks are losing popularity. However, the bold and self-driven investors still make their money from Individual stocks.

If you are a newcomer to the field of individual stock investment, we can guide you. We will go through the basics of individual stock investment. And if it’s not enough, check out reviews on StocksReviewed of teaser stocks to get expert advice.

Picking the right stock to invest can be daunting and confusing. However, if you follow a few rules, you have a higher chance of winning. There are 5 golden rules for picking the right stock and we are going to go through them.

 

The 5 Golden rules for selecting the right stock

Go for The Biggest Players in The Industry

Some big companies come out with more than one portfolio. This is the case regardless of index funds, individual portfolios, or mutual funds. You see names like McDonald’s, Apple, Amazon, and Facebook over and over.

The reason behind this is not a common source of information for investment managers. Rather, it’s because some companies dominate the industries. This simplifies an investor’s work.

These top layers dominate the industry with an iron fist. Customers love the latest products and services that they launch every year.

Don’t think that this is a coincidence because it is not. These companies have the understanding, money, and energy to bring us successful products and services that make them highly profitable and great for investors.

The future is indeed uncertain but an excellent track record indicates future success.

 

Invest In Companies that Are Clear To You

When it comes to investing, you have countless options. However, out of this long list of unfamiliar companies, there are some that you recognize.

They are the ones that produce goods and services that you use. If you are to invest, do so in these companies.

The success of how a product or service does in the market translates to excellent company stock. So, attempt to understand these companies if you don’t already.

Other than that, you should invest in industries that you understand better. This may be a result of working in the industry. Or it could be a because you studied the industry out of curiosity.

The more you know about a company and its industry, the better. Knowledge is the best guide to investment.

There are a lot of promising upstart companies out there that you tempt investors. But a lot of them are nothing but empty promises.

For instance, drug companies claim medical breakthroughs coming soon. But if they do not come up with that they promise, a lot of people will lose their money.

 

Avoid Investing In Only A Few Sectors

You should not focus on a few industries alone. This comes in contrast with the last point as it encourages you to learn more about different industries.

Here is an example that shows you why overloading in a few industries is bad. Let’s say that you work in the IT industry and you know all about it. Your heart will tell you to put all your money into the tech industry.

However, it does not matter how well your industry knowledge is, market fluctuations are uncertain. Just because the IT sector is doing well now doesn’t mean it is guaranteed to have future success.

If you wish to hold 10 stocks, spread it across five or six industries. You don’t want half of your investment to be in one industry. After all, what if it does not perform well, you will lose a lot of money.

This is true regardless of individual stocks or funds. There is just no telling whether a certain industry goes into a bear market. It could happen even if the overall market is doing well.

 

Look For A Concrete Track Record

investors dream of a ton of “penny stock” and see it grow beyond 100 dollars in months. However, this is not a good plan to follow.

Although there are cases where this financial fantasy has come true, most of the time this is not the reality. Unless you have hindsight like a superhero, stay away from such temptation.

It is much wiser to invest in companies that have a concrete track record. Although this directs you away from up and coming companies, the advice is sound.

The first law of earning money is not to waste any. And new companies are more likely to fail in the stock market.

You should look for companies that have been around for a long time. More importantly, they should have a stable track record of profit and revenue. Keep an eye out for consistency in growth.

So, a company that enjoys profit and revenue increase for 8 out of 10 years is reliable. This means the growth pattern of a company is more important than stock prices.

You won’t be the only one who notices the growth of a company. Investors and stock managers will gravitate towards these companies and their stock. All of this means that the company has a reliable future ahead of it.

 

Dividends Matter

Dividends matter. It tells the investor about the company’s profit and returns. Dividends give out an instant return on investment. For this reason, an investor does not have to rely on capital gains entirety.

Income investors find dividends alluring as it is a form of protection if there is ever a market downturn. A company that gives out dividends to investors regularly is in good health.

 

Remember That There Is No Guarantee

If there was a perfect strategy to pick the right stock every time, we would all use the strategy and get rich. The truth is that even the best strategies fail sometimes.

The stock market will fluctuate and there is nothing that we can do about it. We have to accept that sometimes we are going to lose some money in the pursuit of profit.

The best idea is to learn from each and every investment. This will help you formulate your own rules. We hope our guide helps you make the right investments and lands you a lot of profit.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.