Making money in stocks can be as simple and as complex as you’re willing to make it. Many take the complicated approach to investing in stocks which generally results in feeling discouraged.
What I’m about to share with you is a simple step-by-step process for finding great stocks to invest in and picking the best investments even if you don’t know where to begin.
If you’re completely new to investing, check out this simple step-by-step guide to start investing. Once you’ve covered how to start investing, come back to this article to learn how to pick stocks.
Step 1 – Start with what you know
The easiest way to start researching for great stocks is to start with companies that you already know or industries you already understand.
As a consumer, you have a ton of insight into what products/services are good or bad.
Buy what you know – Peter Lynch
Understanding how companies impact you every day is the first step in picking stocks.
Think about companies that you love or industries you understand.
How do they make money? What makes them special? Why are they better than their competitors?
If you feel like you don’t know a whole lot, think again.
Do you have a Facebook account? Do you know about Apple products? Have you ever heard about Harley-Davidson motorcycles? Have you gotten a coffee a Starbucks? Do you watch Netflix?
Keep a lookout for what works for you and what doesn’t and use that to find investment opportunities.
Learn to leverage those experience by connecting your consumer knowledge to your investor mind.
I would not recommend you make investment decisions without having some understanding or experience with the company or industry.
If you can’t explain to a 5-year-old in a few minutes what a company does and how it makes money without losing their attention, then you probably shouldn’t buy their stock.
Action item – make a list of 5-10 of your favorite brands, services or products. Google search them adding the word “stock” to check if the company is traded on the stock market.
Step 2 – Research competitors
The next step in finding great stocks to invest in is researching competitors.
That list of 5-10 companies you love might include great stocks to invest in.
However, in the investing world, you need to have a big picture understanding of the company and the environment it operates in. That means getting to know competitors.
Compare each company on your list to 1-2 competitors. For example, if you picked Apple, then you would want to research (Google) Microsoft.
Here are a few things to think of when comparing competitors:
- How different are their share prices and why?
- What makes one better than the other? Who is the industry leader? Who will people continue to want?
- What are analysts saying about the companies and industry? Which company are they most optimistic about?
- Are they all making money (net income or net loss)? How do company A’s earnings compare to company B’s earnings?
The great thing about researching for competitors is that you may come up with better stocks that you had not initially thought of.
Step 3 – Look at the numbers
So far we’ve found stocks for your watchlist. Now we have to reduce the size of that list to only the good stocks to invest in.
Doing so requires looking at financial statements and numbers.
As a general tip, you want to read the entire financials.
Numbers individually won’t necessarily mean much but as a whole, they tell a story.
Think of it as only reading the first page of a book. While you get a few sentences in, you don’t get the whole story. The same goes for financial statements. If you only look at the first page, you are probably not going to see the big picture.
When reading the financials, you will want to make sure that the company is:
- making money and growing – I’d recommend aiming for a minimum 15% revenue growth over the last 3 quarters AND a minimum 15% earnings growth over the last 3 quarters
- investing in research and development – staying innovative is what ensures a company doesn’t become obsolete (think Blockbuster versus Netflix)
- not relying on a small number of customers for the majority of revenue – if a company has one customer make up 70% of their income you would generally want to stay away from that. Imagine what would happen to the business (and share price) if that customer decided to take their business elsewhere.
- not relying on debt – does the company have a lot of debt? Is it coming due soon and will they be able to pay it? Are their debt levels comparable or does one company rely on loans to stay afloat? As a general rule, long-term debt should be no more than 50% of long-term assets.
After reviewing these parameters for all the stocks on your watchlist, you now probably narrowed down your watchlist to only a few stocks.
There’s one more thing to ask yourself for each stock on that list: “Would I be comfortable holding this stock for +3 years?”
If the answer is no, then remove that stock from your watchlist because the key to successful investing is to stay clear of trading. You want to stick to companies you have faith in the long run. Stay away from a quick flip.
Step 4 – Buy low
You’ve now got a list of great companies which could make for great investments.
But a great company is not a great investment if you pay too much for it.
Look for stocks that are temporarily unpopular or not yet discovered. Buying low is NOT speculatively buying cheap or in a downward price trend.
It is different because you take the last 3 steps into consideration.
Companies don’t grow for no reason and you should only invest in strong companies with room to grow.
That means thinking about the leaders of tomorrow.
What new product/service will change the way we live? Would a change in management uplift the company’s performance? Is the industry changing in ways that favor new innovators?
Now don’t just sit and wait around for the perfect moment to buy a stock.
If you are trying to buy it when it’s at the very bottom, you might get lucky. But the easiest way to buy the stock is right after it has hit bottom and starts climbing back up.
The reason I like doing it this way is because you don’t want to end up buying a stock that will continue to go down.
Last but not least, don’t wait and wait and wait to buy the stock. It is better to be fully invested than to wait around for the ideal time.
Step 5 – Monitor your investments
The last step is to monitor the stocks you bought.
Now, the key here is to not go crazy. You don’t want to check your investments every hour of the day. It won’t help you and small changes in the stock market most likely won’t matter.
One great platform I use to track my money and investments is Personal Capital.
It is a FREE service that allows you to sync all your financial accounts into one location. That means, budgeting, 401(k) analyzer, display of upcoming bills, asset allocation target, investment portfolio tracker and many more.
It’s like Mint but better. Click here to set up your FREE Personal Capital account.
It’s a good idea to check if the stock story stays the same or if it gets better. If the story is getting worse month after month then it is time to reconsider owning the stock.
Make sure you stay focused. That means not investing in too many companies. The more companies you invest in the harder it becomes to monitor your investments.
Personally, I would recommend investing in no more than 5 stocks. Keep it simple!
And remember, you are buying stocks for the long term! This means holding them for +3 years (easier said than done).
If you would like to learn more about my strategy and how to invest in the stock market, you can check out my FREE 10 Ingredient Recipe to successful investing.
You might also want to check out:
- 6 Powerful Steps to Make Money Investing for Beginners
- How to Invest In Stocks: 3 No-Brainer Hacks For Newbie Investors
Do you have any other tips for finding the best investments and stocks to invest in?