How to Choose Stocks and Where to Buy Them. Instructions for Beginners

By  //  November 2, 2022

In this article, Gainy will tell beginners where to find the opportunity to become an investor. Also, in the best stock trading app for beginners, you can find any time for consultation on any questions.

Investing in stocks is an advanced discipline. While with a well-chosen mutual fund you are following the basic rule of spreading risk (diversification), when you buy a particular stock you are selecting one particular story.

You can make a profit from this trust. And it is in the form of share price growth if it happens, and you sell the purchased shares at a higher price in the future, as well as in the form of a dividend, if the company pays it.

A dividend is a share of profits that is paid to shareholders at regular intervals – usually annually, but also quarterly.

Dividends are paid by companies that are already profitable and have at least a few years of operation behind them. These companies tend to be more stable and their rates do not jump by tens of percent in normal times.

On the other side of the spectrum are growth stocks. Their typical representative is Tesla. These are mostly young companies, often in young industries, that are still operating at a loss or moderate profit, they are investing in their future and people believe they will succeed. If such an investment is successful, the appreciation can be tens of percent in one year. If it fails, you can go down significantly.

Stock Screener is a tool that allows users to screen for stocks that meet defined criteria.

Before you start

Investing in stocks is recommended for more experienced investors who know the laws of the market and know that when, for example, the coronavirus pandemic comes, it can shake the markets so much that in a few days your stocks will lose several tens of percent of value.

So you must be prepared to withstand temporary drops as well as real losses if your company (and with it its stock) does not recover. Ideally, you should also be able to read the company’s results and analyze its financial condition.

1. Do not invest all your money in one name – the risk of loss will then be too great. If you want to create your own basket of stocks, follow the same path as fund managers and choose between ten or twenty stocks. 

2. Alternatively, you can spread the risk by investing in a mutual fund and then playing with individual stocks with the remaining money.

3. And definitely don’t invest the money you have as an emergency fund for unexpected expenses. The basis is to have tens of thousands in a savings account that is available at any time. While you can withdraw money from stocks quickly (within a few days), you may find yourself in a situation where the value of the investment has plummeted. By making a premature choice, you deprive yourself of time that would give you the opportunity to reassess it.

How to choose

How to pick the right one from thousands of stocks that are available on stock exchanges around the world? The best way is to understand what the company does, understand the sector in which it does business, know how it operates, what results in it has had in the past, and believe that its business is moving in the right direction and has a chance to succeed in the coming years.

It should have a product of high quality and preferably unique.

 You can also rely on analysts’ recommendations, and regular reports of portfolio managers are also a good source of information about current investment trends. 

If you want to be like the pros and know how the intrinsic value of companies is determined, which requires different analyses, such as industry or technical, then you will need to study the special literature on your own.

Where to buy

You can buy shares from so-called brokers who are licensed to trade on exchanges. Today, most purchases are made online in applications similar to direct banking. You can also buy shares from some banks.

The commissions for buying shares depend on the broker. For example, XTB or eToro will encourage you to buy stocks with no commission, but the apps will try to convince you to do riskier transactions using leverage (buying stocks using credit) where they earn more and are extremely risky. 

You can also purchase private stocks on the secondary marketplace. Private stock is a great investment as it isn’t affected by the surges that affect public-based stocks. Stocks on the private market aren’t publicly traded, so they’re priced completely according to how well the business is doing. They’re great if you like picking stocks yourself and if you find a good pre ipo opportunity on the secondary marketplace, the chance is that you’ll easily make your money back when the company goes public. Even if they don’t go public, private stock with good fundamentals will always stand you in good stead and help you nicely diversify your ocerall investment portfolio.

When to sell

Once you have chosen and bought a stock, you will decide how long to hold it. It is true that there is no single correct procedure. 

Someone tells himself in advance what price he wants to reach and when the stock reaches it, he sells. 

Some people buy shares for a long time and sell only when they feel that the company is not doing well. 

Someone wants to earn only on momentary price fluctuations and will easily sell the shares a few days after buying them. It always depends on the specific purpose with which you invest, the ideal strategy may be a combination of all approaches. 

Learn to live with risk

Over the past five years, the returns of all dynamic pension funds that invest most of their money in equities have been higher than inflation. In the same period, most balanced funds, which mix more equities with safer but potentially lower-yielding bonds, have beaten it.

In contrast, all conservative funds are well below the inflation rate. In times of record-low interest rates, people saving for retirement with a safe strategy are actually making money. This also applies to more than three million people who have old supplementary pension insurance contracts concluded before the end of 2012.

Investment package

If you want to invest for a shorter period of time and be able to access the money at any time with impunity, then mutual funds are offered as an introduction. Like pension funds, they also invest in stocks, bonds, or even real estate.

With them, you buy an investment package compiled by an investment expert or a team of experts from the selected financial institution. 

The basis of successful investing is the so-called diversification, i.e., the decomposition of risk. When you buy shares directly, you put everything into one company. In a mutual fund, you can buy shares of several companies and, for example, government bonds. It depends on how the fund is structured – stock, mixed, or bond. The representation of more profitable and risky stocks decreases from an equity fund to a bond fund.