The first thing to do when deciding which stocks to buy is to consider your risk tolerance. If you would like to invest more conservatively, think about buying mutual funds or exchange traded funds. These investment options allow you to invest in many different stocks at the same time and create a more diverse portfolio that is less likely to experience large amounts of volatility.
If you are looking to invest a portion of your savings in individual stocks (and can risk losing money on these investments), here are a few things to consider before deciding which companies to invest in.
- First, consider the stock’s price to earnings ratio. This number is calculated by dividing the price of a stock by the company’s annual earnings per share. The average price to earnings ratio is about 20, so if you see a company that has a lower one that that, this might indicate the stock is a good buy. (The price is low compared to the company’s strong earnings performance.)
- Second, consider whether the stock provides dividends. Dividends are guaranteed income provided to stock owners. Companies usually issue them quarterly. If you’re looking to hold onto a stock for a long time, earning dividends can be very helpful.
- Third, research the industry you are thinking of investing in. Have stocks in that industry generally performed well in the past? Is there more or less volatility in one industry vs. another?
- Fourth, research the specific company you may want to buy stock in. Has it been in business for a long time? Is it generally profitable from year to year? Does it have a business that you think will survive over the long term?
Once you’ve decided to buy a stock, try to buy when the stock’s price is lower than it has been historically, and plan on holding onto that stock for awhile.
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