Buying Stocks: How To Pick The Right Ones

How to Pick Your Stocks

Picking stocks is such a diverse process that everyone has their own method and although no one method is the ultimate perfect guide to picking stocks, what works for some, may not work for others. That’s why I believe it’s important to find your own method so that you can pick the right stocks for you and the right stocks for you will depend on what your goal may be.

After investing for a short while, I defined a goal and set some rules for how I’d like to achieve that goal. You can read about it here This led me to question which stocks I wanted to make a part of my portfolio. In this post I’m going to explain the method I use to pick my stocks. I’ll talk about how you can find the right stocks for you and I’ll mention some of the mistakes I made along this journey.

How I pick my stocks

I usually like to buy what I know or the companies that I spend money with. For example, I’m an avid user of Apple products so it makes sense that I would buy Apple shares or I have an insurance policy with Legal & General so I would buy stocks in that company too.

I justify this by telling myself that I buy from such companies because I believe in them. Also I continue to be a customer because I trust that they will continue to deliver a great product or service which will hopefully help them to remain profitable.

However this might not suit everyone, nor does it suit me all of the time. I currently have approximately 14 different companies invested in my portfolio and I don’t shop at all of them. This is where the process of picking what stocks work for me comes in and there are a number of things I do before buying:

Stock Discovery

All trading platforms will have a stock discovery feature. I use Trading212 since I’m in the UK but you might use something else like Robinhood or Webull. I first make a list of industries that I’m interested in and then using that list, I can browse the different companies that are trading publicly.

There are lots of filters that can be applied but I like to keep my options broad so the only filters I begin with are the countries. I like to buy stocks from the US and UK mostly because I’m either familiar with them or they appear in most of my news feeds. That tells you what my search history is like.

Once I’ve browsed a few companies from my selected list of industries, I add them to my watch list or a custom list that I may have created on my trading platform. Then I move on to the next checkpoint which is to check the companies recent growth.

Check Growth Trajectory

There are a few time-based parameters to this that I like to look at. It’s easy to check how a company has performed over time. These parameters are (1) 3-month history, (2) 1-year history and, (3) 5-year history.

Keeping these time-based parameters in mind I can answer 3 questions: (1) where the company is going, (2) how have they responded to crashes or unforeseen events like the global Covid-19 pandemic and, (3) has the company’s share price peaked.

The third answer is subjective as it’s based on how high I think a share price will reach however this isn’t just a guessing game. I usually also look at the company’s direct competitors and if the prices are somewhat similar, then it could lead me to believe that it has peaked or is fair value.

I’m not always right and I’ve said in previous posts that nobody can predict the market. That’s something I learned from watching a Warren Buffet clip on the CNBC youtube channel. However, looking at those three time-based parameters can help us predict the trends.

If it pays a dividend that’s great but what else

I think of myself as a dividend investor which means I like to buy companies which payout a dividend. So as part of my process when picking a stock, I like to check if the company pays a dividend. However I don’t invest based on a true or false boolean-like checklist.

If the company pays a dividend then that’s a plus point. The next thing to check is its dividend yield percentage. Don’t be quick to get excited if a company has a high dividend yield because that might indicate that the company is firstly not spending enough to grow its business and if it’s not growing then your money won’t grow and secondly, companies with very high dividend yields tend to slash their dividends which means that you will earn less as time passes by.

Then we have to check how long the company has been paying its dividend. Companies that have been paying dividends for a long time, give me more confidence to buy because the chances of their dividends being cut or stopped are low. These companies are called dividend aristocrats.

This doesn’t mean that a dividend aristocrat can’t suspend its dividends. Recent companies did this due to the Covid-19 pandemic e.g. Royal Mail, Lloyds and Centrica.

I’ve written a complete guide to dividends for beginners in this post which you might find helpful.

EPS

EPS stands for Earnings Per Share. A company can pay dividends if it is profitable and EPS is the measure of how profitable a company is per share.

If a company pays out a dividend higher than its EPS, then that should be a red flag.

What you can do to find the right stocks for you?

Buy what you know

It’s always a good idea to buy companies that you know and I’m sure you know a lot. If you were to list all of the products in your house, you’ll probably list some of the companies that trade on the stock market e.g Do you have a phone – is it an Apple or a Samsung? Do you have a Netflix subscription? Do buy coffee from Starbucks?

These are all great companies to invest in. You can choose the one’s that you like and prioritise based on some of the points I mentioned above. The most important thing is to do your research and not just buy a company because you like it.

If you’re just starting out with investing, you might find this guide useful.

Determine the price you’re willing to pay

Warren Buffet said something I completely agree with. You can’t buy shares in a company based on price because that’s not investing. It’s important you find out about the company because what you’re essentially doing is not just buying a share, you are buying a business.

If you’re worried a price may be too high and you don’t have enough money to buy a share then I’ve written a great post on how you can start investing with little money. Remember that little is more than none.

Avoid this mistake

To err is human is how the saying goes. Everyone makes mistakes and this is one that I made and I’m sure lots of others have to.

FOMO

Nobody is investing when they buy stocks of a company based on FOMO. What they’re really doing is gambling. It might pay but it’s not investing. If you invest blindly then you’re not buying into the company, you just bought for the return and this can make you lose your money.

GameStop exploded. Some people made money but some people lost everything. Be careful.

Timing the market

Trying to time the market is a big mistake because nobody can predict what the market will look like at any point in t time. Trying to time the market for when a crash happens or for when a stock lowers in price can often lead to losing out on an opportunity and reduce your returns.

The best thing you can do is to invest on a regular and consistent basis for example, keep buying shares every month or every two weeks. Doing with will help you to average your cost per share (or in the US – dollar cost average) which can help you make more returns than trying to time the market.


Conclusion

Picking stocks has a process but there isn’t one right answer. What works for me, might work or might not work for you. That doesn’t mean you can’t learn from others but It’s important you learn what works for you. I’ll leave you with the following three key things:

  1. Always do your research and don’t rely on what others do to grow your money. They can act as guides but they may be in a different position to you.
  2. Be careful. Investing is when you risk your money so you can lose it if you invest blindly.
  3. Nobody can predict the future or what the market will do. Regular and consistent investing is much better than trying to time the market.

Hopefully you liked what I had to share. If so, pay it forward by sharing it with others.

About Mazaher Muraj

An established software engineer with over 10 years of experience having worked in the medical, financial and telecommunications sector. Other than that I'm a regular person just like you. I started investing to make my money grow and reach my financial goals. I faced a lot of obstacles at the beginning of my journey because I had so many questions and didn't know where to start. I started this blog to help others in a similar position, to provide high-level and helpful content to make the complicated things about investing as simple as possible for everyone.
View all posts by Mazaher Muraj →

3 thoughts on “Buying Stocks: How To Pick The Right Ones

Comments are closed.