Investing in the Stock Market & Choosing Which Stocks to Buy

by Vinaya HS on March 8, 2018

in General Stuff

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How to invest in stock market? How to get started? These questions can be rather scary for you, isn’t it? How much money you should put in stocks, stocks to buy today, which mistakes to avoid, etc. must be kept in mind. Here are a few pointers to help you invest in stock market and decide which stock to buy.

A beginning investor should ideally not start with the individual stocks. Buying a single stock is kind of riskier than buying a mutual fund that has a large group of stocks. But, if you already have a diversified portfolio of mutual funds and equity funds then you can have a few individual stocks because individual stocks may give you better returns. Also, if you build your portfolio by collecting stocks on your own, you will save a lot of money as you don’t have to pay to a fund manager.

How much to invest?
There is no fixed amount, but you can invest more when you are young and if you are close to your retirement, you should reduce your risk to ensure not to play with your capital. Take your age, subtract it from 110, and the percentage that comes should be what is invested in the stocks. Do know your appetite for risk.

How many different stocks to buy?

For investing in stocks, buy at least 15 different stocks in different industries to have a diversified portfolio. If you are a beginner, start with a lesser number of stocks.

How to choose a stock?

  • Start with a company that you are aware of, because at times a lot of investors buy stocks without understanding how these companies make money, and in such cases, they may have losses
  • Consider price and valuation. Investors often buy stocks that are cheap or lesser in value. But cheap is not always good, and expensive is not always bad. This is measured by the stock’s price-to-earnings ratio or P/E. P/E below about 15 is cheap and a P/E above 20 is expensive.
  • Compare a company’s P/E to other companies in the same industry. This will help you notice if it is cheaper or is more expensive than its peers.
  • Measure the financial health of the company. Study the company’s financial reports. The public companies release their quarterly and annual reports. Do go through the Investor Relations section of their portal.
  • Find out the revenue growth. In the long run, the stock prices increase when companies are making more money. This translates into growing revenue.
  • Check the company’s profit margin. A company that has a growing revenue and also has a reduced cost, will also have expanding margins.
  • Does the company have debt? Do know the company’s balance sheet. The stock price of a company having more debt will be more volatile.
  • Find a dividend or a cash payout to stock investors. It may not be a regular income for you, but a guarantee of good health of the company.

Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

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