How to Pick Stocks
So you want to start investing in stocks, but with so many different publicly listed companies to choose from it can be hard to know where to start.
You could simply open a list of shares listed on the London Stock Exchange, close your eyes, point, buy and hope for the best. You may well end up beating the market by doing this - although, then again - you may not. So for those of you looking to employ a more conventional method of picking shares, we have put together a guide on how to pick stocks for beginners!
Table of Contents
What Is Your Goal?
First things first, before you even think about how to pick stocks, you need to define what your goals are.
Yes, obviously you want to make money, but different investors will focus on different objectives, which in turn will require different investment strategies. Typically, we can outline three main goals of investing:
- Generating income
- Preserving capital
- Growing wealth
Deciding on which of the above is your overriding goal will play a large part in determining how to pick stocks.
Investors looking to generate income will be drawn to dividend paying stocks or shares in REITs (Real Estate Investment Trusts).
Those who wish to beat inflation and preserve their capital are likely to pursue stocks which are as low risk as possible, picking shares in well established companies that already dominate their industry, in other words, blue chip stocks.
Finally, investors seeking to grow their wealth will seek younger companies, which although far from being established in their industry, show future promise and have encouraging financials.
Hopefully you now realise the importance of this first step and with your answer clear in your mind, we will turn our attention to the next step of how to pick stocks.
Pick an Industry
In order to filter down the overwhelming amount of shares to choose from, identify a particular industry in which you would like to invest.
Legendary investor Warren Buffet once said “Never invest in a business which you cannot understand” and here we will echo this wise advice. Make sure that the industry you choose is one which you understand.
It is important to bear in mind that when you buy shares in a company, you are in effect buying a small part of that company. If you do not understand what the company does or the industry in which it operates then how can you accurately determine whether the company is a sound investment?
As well as picking an industry which you understand, it is good practice to pick an industry which you are interested in. The more interested you are in the sector, the more engaged you are likely to be and the easier you will find it to conduct your research – which we will look at later in our guide of how to pick stocks.
Identify Companies Which Have a Moat
For our next step in how to pick stocks, we have borrowed a favoured analogy of Warren Buffet. Just like a castle, a company requires a moat in order to be successful.
Of course, the difference between the castle and the company is that a company’s “moat” is not the physical kind! The idea of a company having a “moat” is that it has some form of competitive advantage – and, thus, protection - over its competitors.
A company’s moat can come in many forms. It could be a technological advantage (like Tesla), low-cost production (like Amazon) or even brand loyalty (like Coca-Cola).
Once this has been established, Buffet tells us that we must figure out what is keeping that moat intact and whether it can remain in place for the foreseeable future.
Research the Company
At this stage in our guide of how to pick stocks, your list of potential stocks to invest in should have been whittled down and now comprise solely of companies whose business you understand and which have a competitive advantage in their industry.
Now it is time to do some research on the companies which remain. Read the financial press to find out the latest news, although bear in mind that you should take commentators’ opinions with a large pinch of salt.
Listed companies are required to regularly publish their financial results, which you can usually find in the “Investor Relations” section of their website. Delve into these reports, look at not just their current performance but also their historical performance. How have they performed over the years? Are they consistently achieving good results? Are they improving or are they moving in the wrong direction?
Some of the figures you should pay particular attention to are:
- Net income
- Earnings per Share (EPS)
- Price/Earnings ratio – a company’s share price divided by its EPS which helps determine whether shares are trading at good value
- Dividend yield – particularly important if receiving a regular income from your investment is important to you
If you are interested in learning more about how to pick stocks using fundamental analysis, you should take a look at our article ‘Fundamental Analysis of Stocks’.
When researching a company’s fundamentals you should not only be evaluating whether the company is performing well, but also whether its share price accurately reflects the company’s value.
How to Buy Shares With Admirals
Once you get to this stage you may be ready to buy shares and the good news is that you can do that right here, with Admirals (formerly Admiral Markets)!
With our Invest.MT5 account, you can buy individual shares from 15 of the world’s largest stock exchanges! In order to buy your first company’s shares, follow these steps:
- Apply for an Invest.MT5 account
- Download and open MetaTrader 5
- Head to the ‘Market Watch’ window on the left hand side of the screen and search for the stock you wish to invest in
Depicted: Admirals MetaTrader 5 – Market Watch
- Once selected, right click on the symbol and select “Chart Window” to open a price chart
Depicted: Admirals MetaTrader 5 – Amazon Daily Chart. Date Range: 5 May 2020 – 9 July 2021. Date Captured: 9 July 2021. Past performance is not a reliable indicator of future results.
- At the top of the screen select ‘New Order’ and you will be presented with the screen below, here you can fill out the amount of shares you wish to purchase
Depicted: Admirals MetaTrader 5 – Amazon New Order
How to Pick Stocks – Why Buy One When You Could Buy a Hundred?
We have tried to make our guide on how to pick stocks as streamlined as possible. However, the reality is that picking individual stocks to buy can be a long and complicated process and is not necessarily suited to every investor.
There are alternative methods of investing in the stock market without picking individual shares. Exchange-Traded Funds (ETFs) allow investors to purchase a basket of stocks with just a single investment.
ETFs are a type of security which track an underlying index, sector, economy, commodity or any other type of asset, by holding investments in securities which are carefully selected in order to mimic their underlying market.
For example, one of the most popular types of ETF are index ETFs, which are designed to track a stock index, such as the S&P 500. An ETF which tracks the S&P 500 will hold shares in all the companies that make up the S&P 500, meaning that an investor can gain instant exposure to the entire stock index with a single investment.
Just like shares, ETFs are traded on stock exchanges which makes them an easily accessible investment option for retail investors.
Invest With Admirals
An Invest.MT5 account allows you to purchase shares and ETFs from 15 of the world’s largest stock exchanges at competitive terms. Other benefits of the Invest.MT5 account include:
- The ability to open an account with a minimum deposit of just €1
- Free use of the world renowned MetaTrader 5 trading platform
- Exclusive access to our Premium Analytics portal, where you can find the latest market news, sentiment and technical analysis at no additional cost!
Click the banner below in order to register for an account today!
Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.