Thinking of starting your stock investment on your own? But which stock should you buy?
The very first thing to do is to learn how to assess a stock’s true value and its potential return and risk level before you put in your money into a company. If you have heard about “buy low, sell high” strategy, it sounds fairly easy, but it’s not only what you need to consider. It is all possible to buy low and yet never see a return because the company you have chosen fails.
First of all, I always say that a beginning investor shouldn’t actually “begin” with individual stocks. If you’re just starting to build your financial investment portfolio, it is risky to do stock trading. I highly recommend a low-cost mutual fund that tracks a large group of stocks because it is less risky. You can leverage on fund managers’ expertise so you don’t need to thoroughly research about which stock to buy.
But if you already have a diversified portfolio of mutual funds and UITFs, then it is still a right move to add in to your portfolio a few individual stocks you can buy directly from stock market. The high risk, high return trade-off principle will tell you while there is the risk of an individual stock, there’s also the potential for greater returns.
Here are tips on how to choose a stock:
Buy stocks familiar to you.
Choose an industry or a company that you know. Think about the big brands, your favorite brands, the busiest fast food chains and the oldest and biggest corporations. When they are part of the top brands, you can put into context that they are earning very well as well.
Or you can refer to the top 30 corporations or the blue chip companies as they are those that compose the Philippine Stock Exchange Index. Their stocks have a proven track record and daily trades are in high volume.
Assess financial health.
Financial reports of the companies provide the results of the entity’s operations and financial activities and they quantify the financial strength, performance and liquidity of a company.
Start digging into the company’s financial statements. All publicly-listed companies have their financial reports released to the public so you can easily research them on Google or in their websites. PSE edge is a good reference website that provides the listing of all companies as well as the financial reports.
When you study a company’s financial statement, don’t just focus on the most recent report, instead look for a consistent history of profitability and financial strength.
1. Check the Income statement if there is revenue and profit growth.
2. Check the balance sheet to check how much the company funds its resources from debts or liabilities.
3. Compare the balance sheet of one company to another in the same industry.
4. Find stocks that offer dividends. A dividend is a cash distribution of a portion of a company’s earnings to stock investors.If a company pays dividents, t’s a sign of a company in good financial health.
5. Select stocks with strong cash flows. Cash is still king. Meaning it is more valuable as it is used to fund a company’s operations.
Check fundamental and technical analysis guides.
If your broker is COL financial, you can find daily investment guides available to your dashboard. They show the summarized updates on each stock with recommendations on which stock to buy or sell based on fundamental and technical analysis.
Assessing a company’s financial health or doing fundamental analysis on your own can be overwhelming at first. So you can turn to guides to help you select a stock while you are learning how to do the analysis on your own.
Technical analysis on the other hand is about using price charts and various analytical tools including indicators and chart patterns to evaluate a stock’s strength or weakness and predict future price changes. This method is usually used for short-term or active trading. But it may require time for you to learn to use the various analytical tools available. Good thing there are also technical guides.
After you’ve done your research, you’re now ready to begin purchasing your first stocks.
If you are looking for financial advice or more information, send us a message to schedule free non-obligatory financial planning meeting.