How to decide which shares to buy

Personal finance - and the financial industry in general - is awesome, but starting an investment journey is not easy. Lots of beginners find it difficult to take the first leap, which leads to procrastination. You don't necessarily need a financial advisor to get to know the basics.

The first step to decide which shares to buy is determining your investment goals. Do you want to build wealth over time? Or, does your focus revolve around starting investing as soon as possible to earn short term gains? Let's see the arguments.

If a stock is volatile enough, stock prices may vary a lot within its daily performance. However, a long-term investor can argue that historically, the trend - of the markets - has been upward. Of course, this doesn't mean this will continue this way, nor does it mean that it won't.

Alternatively, some traders argue, that it is better to actively monitor a stock and its daily movements to pinpoint an entry and exit point for short term gains.

Define your investment goals

First, you need to understand your goals, as they can have massive influences on your stock pick. For example, beating inflation can be one.

Or having a savings account, that would slowly, but gradually grow over time if everything goes right.

Second, take into account whether you have any other circumstances - like personal goals or life events. Retirement, education goals or just the sake of having fun on the markets and trying out something new.

Set up a timeframe

Generally, stock investing supports long-term dedication, so it is best to set up a timeframe. Do you want to invest over the long term - a month, week, or years - or less?

For example, Warren Buffett's famous dollar-cost average index fund strategy requires a timeframe of 5-10-20 years to be most effective.

Answering this will help you narrow down which exact stock or stocks to put cash in at a certain price. Or even, it may lead to different products than stocks if you'd like to trade (buy and sell stocks) on the short run instead.

The shorter the timeframe for gains, the riskier the trade/investment can be.

Get to know the risks

No investment is risk-free. Even if you pick stocks in which you are 100% sure and start investing, it doesn't mean it'll lead to gains.

Investing in shares will lead to greater risks than other investments, like government bonds. All we say is, that do careful financial planning and be prepared for losses. As well, for gains too.

Picking individual stocks in a specific company/companies

Picking one stock the invest in means that we'd rely on a single stock, or a business sector hoping they will do exceptionally well. This may be good for investors, who really understand the company/industry, and know when to get out of the game.

However, it is not good to put all your eggs into one basket. It is not recommended to put all your savings into individual companies within the same industry, or one company as all your savings would depend on the long term stability of the company you have become a part-owner of

Investing in portfolios

Going with a portfolio is the opposite of having all your savings in one stock. A portfolio is a collection of several different investments. One example, here we don't rely only on Apple Inc.'s performance, but we have also had shares of companies in different industries, like travel, health etc. besides tech-related shares.

Portfolios are good, as they can minimize risk. Individual stocks can be risky, but with a diversified portfolio you can minimize your risks - at least that's what industry experts generally think.

Barbara Friedberg, an expert investor and owner of BarbaraFriedbergPersonalFinance and RoboAdvisorPros financial blogs also weighs in with a few tips: 

"Picking stocks as a beginner investor is both exciting and terrifying as investing in equities includes the possibility that the stock price will go up or down. Before investing, spend time learning about how to invest and understand the risks and benefits. Start investing with the understanding that an individual stock portfolio should ultimately contain 10 or more stocks, for diversification. That way, when one stock declines in price, and it will, you'll have others that will increase in price. So, if you have $1,000 to invest, plan on investing $100 in each stock. Then, make sure to choose stocks from different sectors, because if you invest 10 stocks in technology, and the sector drops by 15% most of your stocks will also decline in price, leaving your $1,000 portfolio worth $850. Plan on investing for the long term, instead of day trading or jumping in and out of the stock market."

If we define popular stocks as the ones going on hot trends, for new investors, we'd advise not to follow them as they might not be a good investment. It's hard to predict how far the popularity of a trend will keep going. It can last for weeks, years or even days and minutes.

If we define popular stocks as classic "large company" stocks like Apple, Facebook, Amazon and Google, that is a different story. These can be used as growth stocks - as they can work well with long-term goals. They are conservative investments, they might not gain much but for these companies, the probability of a major collapse is less as well.

Knowing this, let's see how we can scan all these individual circumstances to make the best choice when picking a stock to invest some cash in.

We asked Barbara for advice on how to decide when picking a stock, and she points to the following: 

1. Understand the company that you are buying including what it does, it's products, it's industry, and what initiatives will continue to drive the price of stock upwards.
2. Be aware of the value of the stock by reviewing price earnings, price to sales, price to cash flow. Look at debt margins. If these ratios are extremely high, when compared with the industry and the company's former ratios, then you might want to wait for a dip in price before you buy. 
3. Choose a stock that you understand and even have some knowledge about.

Now you stand before the gates of a stock purchase. Below we list a few tips to think through that may help you decide which stocks are worth buying so that it won't lead to an instant sell of the asset.

1.: List the companies you know

A good practice is to have a short brainstorming session before jumping on market news, any balance sheet or an annual report. List all the companies you are interested in as it is easier to follow business news with companies you know through and through. Their goals, products, service, anything - it'll eventually help with investing your money. This is the first step of what we'd call a fundamental analysis - an analysis in which individual investors decide between investments based on how the overall state of a company is. Including their financial statements, competitors, markets, production, earnings, employment, their price & earnings ratio, market capitalization and so on.

2.: Research the stock

Now's time to do some fundamental analysis to help you decide whether the stock has enough value for you to invest in. How we measure value - now, that's a hard question to answer. There are no "good" ways to do it.

The best is to take your time to learn how to understand company documents like annual reports and balances sheets. If you have a basic understanding of where a company is going - what their plans are, how they manage expectations - you might have a firmer grasp on the decision you are going to take-

It is also recommended to see the overall picture - how the company performs as a business. Was there a downturn? Did they react correctly to market demand? How did they react to crises, like COVID-19? Read the latest news of the chosen company and stock, to get a clearer picture of where it's headed.

To determine value, it can also help to have a technical approach - aka focusing solely on the technical aspects of how a share has performed lately. This involves a deep dive into charting and using research tools.

You may consider using a stock screener. WallStreetZen, for example, doesn't only just show financial data but helps users interpret the data and understand the context.

3.: Choose the number of shares and a price you are comfortable with

Now, you know in which share or shares you'd like to invest in. The last step is to decide how many shares are you comfortable with. Highly-priced shares would require a big amount of capital - therefore, you don't necessarily have to buy a great number of shares at the same time, some strategies may suggest you buy one share - or a fraction of a share - at a time.

If you are not sure about owning a whole share - as it might be priced high - you can cut costs by owning a part of a share. These are called fractional shares. Be sure to choose a service that offers fractional shares.

You can also learn a lot from other investors' experiences. Barbara tells us her recent thinking when choosing stocks: 

"Today, I invest primarily in broadly diversified ETFs like US and international indexes, along with value, mid, small cap ETFs and REITs. Although I still pick stocks occasionally, I look for companies that I think will benefit from a trend. When I saw a price drop in one of the major manufactures of the Covid vaccine, I bought shares. It was also beneficial that the stock paid a juicy dividend. I have owned one of the major big box home improvement retailers for many years. I bought this stock at a time when the price earnings ratio was low and the price was depressed. I believed that the home improvement trend would continue, and it has. While one of my worst stock picks was the former top cell phone manufacturer, who is now struggling."

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If you'd like to research on your own, generally, it is important to look out for these factors when choosing a broker:

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In our reviews, we detail everything from the list above.

Want to know more before buying shares online? Check out these articles to deepen your knowledge:

• How to buy shares online
• How to choose your stock order type 
• How to choose an online broker