How to Choose the Best Stock to Invest in?

Aside from investing in a hedge fund, what an investor could do is invest in a few individual stocks to get started in the market.

Choosing the best companies to invest in is the first step into designing an investment strategy. Some advisors believe that a person that is new to the stock markets should not have a portfolio of individual stocks chosen by the person. If you buy stocks individually, it might have more risk than just buying an index, however, it also has a larger upside. Considering though, the methodology by which new investors choose their stocks, the downside might be larger than the upside. 

If you got a diversified portfolio already of ETFs and mutual funds, then you may wish to add a few top stocks. You have to keep in mind, thought that with any individual stock, there also is the potential for great returns.

Keep in your mind that whenever you're buying the best stock, then you're also becoming a part of that company. Thus, short-term market movement aside, the worth of your investment is based on the business health. Here's how to select the best stock:

Purchase what you are familiar with. Start with a company or an industry that's known to you. Here are the reasons:

·         Circle of competence. You only know why you select to purchase your favorite brand or how much busy the restaurant down the road is on a distinctive night. That's not the complete information you'll need, certainly, but it might help you set those companies' earnings report in situation.

·         Avoid the hype. Lots of investors, during dot-com bubble, bought stocks without completely knowing how those companies actually created value added and wealth. In lots of cases, it turned that, management didn't entirely understand it either.

Consider valuation and price: Investment experts often look for the stocks that are "undervalued" or "cheap." Usually, what they signify is that the investors are paying fairly a low price for every dollar the company is earning. It is measured by stock's P/E ratio, or price-earnings. Speaking very roughly, P/E below 15 is considered inexpensive and P/E above or almost 20 is considered costly. But there's much more to it including:

·         Know what type of stocks you’re speaking about: A company, which is expected to rise quickly, will be more costly than a recognized company that's developing more gradually. Compare any company P/E to the other companies in same industry to observe if it's more expensive or cheaper than all its peers.

·         Cheap always isn't good and costly isn't bad always: At times, a stock is inexpensive as its business is raising less or slowing down actually. And, at times, a stock is costly because it's broadly expected to raise its earnings fast in the next years. You wish to purchase stocks that you reasonably can expect will be more valuable later, thus look at worth combined with expectation for future profits.

Evaluate financial health: Begin digging into the firm’s financial reports. All the public companies require releasing annual and quarterly reports. Don't only focus on the recent reports. What you're actually in search of is a constant history of financial health and profitability, not just one excellent quarter.

·         Look for revenues growth: Anything can occur day to day; however, in long run, stock rates increase when the companies make more money, which generally starts with rising revenue. You'll hear the analysts refer to revenues as "top line."

·         Know how much debts the company has: Find out the firm’s balance sheet. Usually speaking, the share cost of any company with more debts is possible to be more explosive, as more of the company income needs to go to debt and interest payments. Compare the company to all its peers to observe if it's borrowing any unusual amount of wealth for its size and industry.

·         Check bottom line as well: The difference between expenses and revenue is a company's profits margin. A company, which is growing revenues while controlling costs, also will have expanding margins.

·         Find a dividend: The dividends cash payout for the best stocks is certainly nothing to ignore, it is not only a source of income, it's a symbol of a company having excellent financial health as well. If any company pays dividends, look at the past. Are they increasing dividends or not?

What you should not do when buying any stock?

·         Don't purchase on price only: Don't assume any stock is a good deal only because its cost has dipped 10 percent. Make sure that you understand how and why that price will rebound.

·         Don't rely on analyst recommendations only: Analyst's reports can provide some excellent information on the business health, but be alert that they can be biased for the 'buy' ratings. But due to that bias, the sell rating, particularly new sell ratings, from any analyst could be the red flag. Keep out an eye for those calls.

In any case, if you are not comfortable buying individual stocks you could always invest in a hedge fund now that the new regulations have taken effect there is no excuse not to invest in one.