by Nick Agwuncha
How to pick stocks: A practical beginner’s guide
Before hopping onto the investing gravy train, it’s important to ask yourself the following:
1. Have you paid off all outstanding high-interest debt?
2. Do you have a six-month emergency fund for urgent and unplanned expenses?
3. Are you willing to hold your investments for more than five years?
Investing is not a get-rich-quick scheme. It requires knowledge and time, especially if you are going to get involved in stock picking, one of the riskiest of them all. Often, people will invest in a particular stock based on recent news coverage. This can be a mistake. To prevent you from making costly errors whilst also giving you a good chance of making some decent returns, I’ve laid out a simple guide for picking stocks.
Develop a basic understanding of the business
- What is their business model?
- What is their competitors’ advantage over businesses operating in the same industry?
- How much market share has the business acquired?
- What is the dynamic between shareholders and the management of the business?
Review the financial strength of the company
A high-quality stock tends to have a good financial track record and can generate strong gross margins and net margins which is a good indication that their products and services are in demand.
- The company doesn’t hold too much cash or too much debt (holding too much cash may be an indication the market is saturated, meaning the business has limited potential for further growth)
- The company shows rising cashflow
- There is evidence of consistent revenue and net profit
- The company presents a high return on equity
- The investment offers a good price to earnings ratio. This is just a way to determine whether the stock is fairly valued/priced
Understand the growth prospects of the business
It’s fair to say COVID-19 has allowed people to take a step back to evaluate the companies and industries that are able to ride through a crisis and emerge stronger. Understanding the drivers behind a company’s growth gives a good indication as to whether stock prices may go up in the long- term. In putting this into practice you may want to consider the following COVID-19 trends and companies:
• The world is shifting towards a cashless society so digital payments are booming (Square, Mastercard and PayPal)
• Remote working is here to stay (at least for some time), which may lead to individuals pursuing more freelance opportunities, so there will be a continued surge in the demand for certain platforms (Upwork, DocuSign, Twilio)