The crucial moment is choosing the shares. Your profit and exposure depend on it.
Before choosing, decide on the purpose and strategy of your investments. There are two types of investors – risk-averse and aggressive. The risk-averse investor makes long-term investments and focuses on dividends before everything else. He does not expect a ‘quick’ profit, but is more concentrated on his protection. Aggressive investor is ready to take risks for greater income. He gambles at the increase (and sometimes even at the roll-back) of the stock value.
How risk-averse investors choose securities?
The first selection criterion is reliability. Keep your eye out for the large companies (for example, Microsoft, BHP Billiton, FedEx), old-established and secure against economic crisis. Shares of such companies (‘blue chips or large-cap stocks’) do not show significant lapses in value year on year.
The second criterion is high dividends. You can be sure to have them when purchasing, for example, shares of AT & T, Verizon Communications, Pfizer, Intel, Cisco Systems (but as we all know, dividends are not an obligation and past payments cannot guarantee the same ones in the future). However, not all the companies that pay high dividends are a good option for long-term investments.
The high-tech industry is subjected to changes and is not the best option for risk-averse investment. Companies that belong to the petroleum industry depend on the world economy dynamics and political situation in the country. You can invest in them, but with caution.
How do aggressive investors choose securities?
An aggressive investment is more complicated: you need to analyze the state of the economy, the industry, the company itself. If the business is going strong, and the company is making large profits, its shares are likely to rise in value (however, the certain risk is still present).
Pay attention to the Stock Chart; compare it to the changes undergoing both in the industrial sector and in the company itself. If securities are cheap while the company is in the growth phase, it is a good timing for a purchase. When the shares grow in value, you can sell them with a considerable profit. The higher the upside potential, the more you will be able to earn.
In 2017, Tesla Motors shares rose by almost 40%. It is possible that they will continue their growth. But in 2018, we witnessed the moment when the shares plunged from their historical maximum even to 30%.
An aggressive investor is more at risk: stocks that grow rapidly in value are prone to rapid plunges.
How to Analyze Shares?
There are many key factors when it comes to stock selection. We will loosely divide them into two groups:
- External factors
These are macroeconomic indicators, the economic and political situation in the country, the standing of the industrial sector. To get the facts straight look through news feeds, expert opinions, analysis of shares of similar companies.
- Internal factors
These are company’s finance indexation, its income and net profit, their ratio (profitability), liquidity of assets. The liquidity of assets (how quickly one can sell securities) also matters.
Also pay attention to the market price per share /capital per share ratio. Capital per share can be calculated by dividing the total share capital (this figure you will find in the balance of profit) by the number of issued shares. If the market price exceeds significantly the capital, the shares are re-rated and may soon go down in value. The reverse situation indicates that the securities are undervalued. If capital per share exceeds the market price, it can also be a sign of serious problems inside the company. Pay attention to the net profit and revenue.
Almost all companies, whose shares are listed at stock exchanges, publish their reports every 3 months.
The longer the investment period is, the longer should be the period under examination when selecting stocks. For example, when purchasing shares for a year, evaluate the financial performance of the company for 2-3 years. All this can be done by studying the information on shares on our website.
Diversification reduces risks!
Do not invest in shares of one sector and, especially, one and the same company. For example, you can buy American, European and Asian securities in the auto industry sector (Ford Motors, Volkswagen, Tata motors) and in telecommunications (Verizon and SoftBank). If you are interested in the commodity trade market only, look for the shares of Exxon Mobil, Royal Dutch Shell, ENI.
Experts and brokers will help you with shares selection. Both are interested in their forecasts working well: the reputation of an expert and the income of a broker depend on it. Make an independent decision, but with due consideration of the experts’ opinion.