Choosing A Stock: Part 1

This article originally appeared on DriveWealth

For the average investor, there are not many topics that come to mind faster when considering personal finance and accumulating wealth than the topic of stocks. People talk about stocks in this regard all the time. Of course, it is not difficult to understand why talking about them is so popular… the stock market can be quite a thrill! That said, the stock market can also be extremely risky and should be handled with care. For most of us, it is likely that there will be a roller-coaster of ups and downs throughout our experiences in “playing” the stock market; yet, everybody still hopes to experience the ups without the downs.

So how do we get only the ups? To have the best chance of experiencing the ups without the downs, you must become very good at picking which stocks to invest in. Interestingly, there is no one singular best way to pick stocks. In fact, there are tens, hundreds, or maybe even thousands of different factors that can be put into consideration before a trade is made. Further, while some strategies are extremely complicated and involve menacing theories or algorithms, there are some much less intimidating ways to get started. Here are some tips to help you begin on your journey of building a great investment portfolio:

1.     Be Passionate

 Although it can be fun, there is no denying that investing takes some work; and just like any other type of work you have done in your life (whether it be a job or school), being passionate about the work you do makes the whole process much more enjoyable. This same mindset can help you pick companies to invest in, as well. What are you passionate about in day to day life? Maybe you know of a company that aligns with your personal passions, such as being charitable or particularly eco-friendly. For example, Walmart has recently been praised for its philanthropic efforts, they even pledged $100 million in 2015 to advance economic mobility for retail workers. If you happen to have a passion for individuals who work in retail or other minimum wage earning jobs, perhaps Walmart’s newfound generosity in that area will persuade you to consider it as an investment opportunity.

2.     Invest Where Your Loyalties Are

Perhaps you are a very active runner and loyally choose Nike shoes. If you believe they are the highest quality and you think that they will continue to sell more shoes in the future, you might invest in Nike. This means you are betting on Nike to remain successful, and even grow, in the future. Further, investing in companies that you like can help you pick companies that you are already familiar with and can save you a little bit of time in your investment research!

3.     Listen to the News

If you do not have a personal connection with a company to help motivate your research, perhaps you simply hear good things about one in the media. For instance, Amazon has been in the news many times in the past year, due to its aggressive growth initiatives and creative business tactics. If new stories like those continually catch your attention, it might be a sign that you would enjoy doing more intensive research in order to potentially make an investment.

4.     Remember to Diversify

Our last strategy for you to consider today is diversification, which is most broadly defined as the action of becoming more varied (or “diverse”). In investing terms, diversification refers to the popular ideology that putting money into a wide array of companies is better than limiting your portfolio to just one or a few similar companies. Using this strategy can reduce your total investment risk, as it is far less likely for multiple companies to perform poorly all at the same time than it is for one to independently perform poorly. Unfortunately, though, some newer investors are turned off by the idea of diversification, because they worry that it is too expensive to buy equity in multiple different companies that they like. Luckily, this is not an issue when using DriveWealth. Since DriveWealth enables you to buy portions of a single share (or stock) using a dollar based system, investors with less capital do not need to be intimidated or discouraged to purchase portions of stocks offered by their favorite companies! Everybody is free to diversity as much as they would like to.

Or course, there are always more extremely complicated strategies that can be put into play when investing. However, as an investor, you may want to remember the basics, too. No strategy is fool proof. In this short series, you will continue to read about more tactics that an investor might consider before making a trade. Remember, it is important for every investor to find his or her own investing style, which may take a lot of self-exploration, trial, and error. So, keep reading in the coming weeks for some new stock-picking strategies that could be just right for you!

Click here to read Choosing A Stock: Part 2 - Fundamental Valuation.