Tips for beginners on how to select stocks

Investing in stocks is a good option for beginner investors for both the short and long term. However, picking the right stocks can be a daunting task, as there are literally thousands of stocks to choose from on the world’s biggest exchanges. In this article, we will show you how to pick a stock to buy if you are a beginner.

THE ESSENCE:

Set your investment goals and feel out your tolerance for risk

Use these to find the right sectors to invest in

Do your research: only invest in companies you understand

Diversify: don’t put all your eggs in one basket

Have investment timeframes and price targets in mind

Table of contents

Intro
How do you know what stocks to buy as a beginner?
How much should you invest in stocks the first time?
How long should you hold your stocks?
Further reading

How do you know what stocks to buy as a beginner?

Instead of sifting through hundreds of stocks you know nothing about, the best way to select stocks to buy is to first zoom out and figure out your investment goals, then narrow things down from there.

Set your investment goals

As a first-time investor, your motivations may vary. Do you want to strike it rich and retire when you’re 35? Do you want to slowly build up wealth for your old days? Or do you simply want some steady income on the side? Whatever your goal is, it should shape your approach as to how to select shares to buy and in which sectors.

Those seeking spectacular but potentially risky growth opportunities often invest in promising startups in IT or biotech, among others.
Investors looking for a steady, reliable growth in their portfolio are usually drawn toward large companies in sectors such as manufacturing or retail, or long-established tech or IT giants.
Meanwhile, those interested in regular dividend income will probably find the best stocks for their needs in the telecom, utility or banking sectors.

Your tolerance for risk can also guide your choice of sector or stock. If you can afford to take more risk, you can make bets on new industries or exciting but little-known startups. If your risk tolerance is low, it’s probably a good idea to stick to well-established industries and companies with a solid track record.

Do your research

Once you have zeroed in on one or more specific industries, the next question is how to select a stock to buy. Many broker platforms or financial websites have stock screeners where you can list stocks from a certain industry and sort them by company size, earnings performance, share price and other criteria. You can also look at the composition of some industry-specific ETFs (exchange-traded funds) to get an idea of who the biggest players are in that industry. Alternatively, you can browse financial news and blogs to find out about lesser-known but potentially exciting stocks.

If you have narrowed it down to a few candidates, you should do basic research on each company. Investor presentations on the company’s website are a good place to start. Aim for a rough understanding of the company’s business model, how it makes money, and any risks it may be facing (like regulation, foreign competition or changing consumer trends).

As you do your research, the following items are also worth checking:

Read the company’s latest quarterly earnings report, and check when the next one is due - prices often move up or down around the release of these reports, potentially creating good trading opportunities
Watch out for upcoming product releases or service announcements - these can also move the share price and provide a glimpse into the company’s plans
Check the stock’s price-to-earnings ratio (P/E) to see whether it may be undervalued or overvalued historically or in comparison with its industry peers
Take a look at the stock’s price chart to see if you can spot a long-term falling or rising trend (it’s not always easy!)

If you have found a stock that you think is worth buying, the next question is, how do you buy shares online?

If you don’t know where to start, check out our My First Stock Trade Quest, where we guide you, step by step, through the process of opening your first broker account and buying your first stock.

How much should you invest in stocks the first time?

All this time, we’ve been talking about selecting a stock to buy, but in actual practice, you should never invest in just one stock. It is always a good idea to diversify your holdings, so that even if one of your stocks takes a hit, your overall losses will be tolerable.

You should diversify your holdings not only at the stock level, but also across industries. Even if you believe in high-risk, high-growth stocks in fast-evolving sectors, it's worth keeping some less-volatile stocks from well-established industries in your portfolio. Conversely, conservative stock investors often set aside a small part of their holdings to experiment with high-risk but potentially fast-growing stocks.

How much you should invest as a beginner investor will, to a large extent, depend on your income and financial situation. It is often a good idea to start with smaller amounts first, and increase your regular investments in stocks later on as you get more confident. Most online brokers only require a small minimum deposit or none at all, so it’s possible to start with as little as $50 or even less.

You will notice that some popular stocks cost several hundred dollars per share, but this shouldn’t discourage you even if you only have smaller amounts to invest at a time. An increasing number of online brokers offer so-called fractional shares, where you can buy into a high-priced stock for as little as $10. Here’s a good example of how to buy fractional shares at an online broker.

Other considerations include currency rates and conversions. For example, if you’re from outside the US but want to invest in US stocks, you need to be mindful of the exchange rate between the US dollar and your home currency. Your broker may charge a conversion fee when you deposit money or when you carry out a trade, and your future gains/losses (as expressed in your home currency) will be influenced by moves in the exchange rate. Make sure to read forecasts on where the exchange rate is headed on your investment horizon.

How long should you hold your stocks?

Studies show that stocks generally outperform other asset types over the long term, but this doesn’t mean you should keep all of your stocks forever. It is a good idea to have an exit strategy when you buy a stock, keeping your overall investment goals in mind. For example, you can think through in advance if there is a price level where you’ll want to sell a particular stock and take your profit.

You should also think of a strategy on how to handle bear markets or sudden downturns in the price of a particular stock. It’s important not to panic: stock prices can be naturally volatile. Still, it is probably worth setting a price level at which you may want to sell a particular stock, so that you’re not swept away by a sudden collapse in the share price or get stuck in a stock that may be in permanent decline.