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What Are the Best Tips for Choosing Stocks?

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  • Written By: Ray Hawk
  • Edited By: E. E. Hubbard
  • Last Modified Date: 27 August 2019
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    Conjecture Corporation
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Tips for choosing stocks can be separated into two broad categories. First, it is important to determine the types of industries in which someone is interested, and the degree of risk that is acceptable. This will narrow down the field of available stocks considerably. Secondly, research into possible companies should be done before any stock is purchased, including reading about a company's performance history, its competitive niche market edge, and any future products or services that it may be planning to put on the market soon. The financial statements for the company should be obtained from its investor relations department, which are free to anyone interested in a publicly-traded company.

Types of stocks are categorized by risk level first by the company's capitalization size. Large capitalization companies are very stable and low risk, but also grow slowly. They include corporations with a market capitalization of $10,000,000,000 US Dollars (USD) or more. On the US New York Stock Exchange (NYSE), these are referred to as blue chip stocks. The largest and most prominent 30 of these companies together are tracked to make up the Dow Jones Industrial Average (Dow), which is used by investors to monitor overall trends in stock market movement. Large cap companies are institutional firms with international reputations, such as large retailers, auto makers, or restaurant chains.

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Mid-cap stocks offer moderate risk and growth, and have a market capitalization of between $2,000,000,000 and $10,000,000,000 USD. While they are riskier to invest in than large caps, a significant return on investment (ROI) might be seen in a few years versus a decade or more for large caps. They include niche industries such as consumer electronics that have established themselves over many years of gradual growth and success.

Small cap stock companies are seen as the smallest companies that are still relatively stable and safe to invest in for investors willing to face significant volatility in stock value. They range from a market capitalization level of between $300,000,000 to $2,000,000,000 USD. These include high-technology start-ups, Internet-based companies, and others new to the market or in-trend based industries that have a high potential for rapid growth as well as failure.

Picking stocks by capitalization size first will define the level of risk and patience one has for growth of the stock over time. From there, choosing stocks involves looking at companies engaged in familiar types of business that relate to personal and career experiences. Otherwise, if the products or services that a company offers are not well understood, it can be very hard to comprehend market news and trends about the company and know when it is best to buy or sell the stock.

Once several possible companies to invest in have been located, choosing stocks becomes a matter of researching the individual companies in depth. Obtaining a company's financial statements, though they are written in a biased way to cast favor on the company, gives a general overview of the firm's future. Trends should also be tracked online by going to various reputable stock sources and following the news bulletins about the company. While the company may have been a strong performer in the past, downward trends can take years to turn around. Many investors also recommend looking for the big fish in the small pond when choosing stocks, as industry leaders in niche markets are more likely to thrive than their upstart competitors.

A general analogy for knowing when to buy and sell stock is the falling safe and rising rocket principle. Imagine that the company is a safe full of money falling off of a building. It is not wise to get under it and invest in it as it falls, but, instead, to wait until it hits what looks like the bottom and bounces. Stock should be bought when a company has appeared to bottom out and be undervalued, and has then shown a predictable trend of climbing. Selling stock held in a company that is on the rise should also be avoided until the rise has appeared to peak like the apex point of a rocket and then begun a steady decline. This ensures that a maximum possible value can be obtained, since it is hard to predict how high any stock can actually go.

Diversifying across many industries is always recommended, so that losers are offset by winners. Making sure that the company is well-managed and has a reasonable level of debt that won't threaten its future or cripple the potential for growth is also important. Companies that acquire investment by institutional investors, such as large stockholders and investment banks. also tend to be a good risk, as these are industry insiders who known more about the company than the average person choosing stocks does.

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