With the ease and availability of technology, investing has become increasingly accessible over the past decade. This access has made more people than ever, including myself, jump into the investment game and become interested in growing their portfolio.
Over the years, I’ve often been asked how to choose the right stocks. I like to recommend the five golden rules. Following these rules won’t guarantee huge returns. But if you choose a stock that checks these boxes, it may be a winner!
Five golden rules to choose the right stocks
- Invest in companies that are industry leaders. Whether you’re interested in mutual funds or individual stocks in entertainment, natural gas, tech or another industry, companies like Amazon, Apple, Disney and McDonald’s have a strong track record and consistently put out new products and services that are well-received by the public. Again, there’s no guarantee that this will continue, but it’s a strong indicator of ongoing success.
- Invest in businesses you understand. There’s a spectrum of understanding when it comes to investing. For example, most of us have a general understanding of the companies mentioned above but if you work (or have worked) in one of these industries, your knowledge level is likely higher. Choosing stocks or funds in this category could improve your chances of success.
On the other side of the spectrum, companies you barely understand or don’t understand at all may look promising on paper, but they may not be the best choice—their product may be experimental or there may be too many unknowns. The key here is research. Follow the individual stocks for a while and look at the history. Read up on the industry itself to learn more. - Diversify. Yes, you should understand the industries you invest in. It’s also important not to limit your investments too much. No matter how well a particular industry, or individual stock, has performed, it’s still subject to market volatility. Spread your investments around. If you plan to hold, say, eight different stocks, make sure they are diversified across four or five industries.
- Go for the solid track record. Everyone wants to buy in for pennies and then watch the stock soar in a short amount of time. This scenario happens from time to time, but for every dream come true, there are thousands of duds. Choose a company that has a proven track record and whose revenues and profits have grown consistently.
- Dividends matter. Dividends are regular payments of profit made to investors who own a company’s stock. Not all stocks pay dividends. Choosing stocks that do is an attractive option because they provide an immediate return on investment.
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The stock market can seem like an intimidating place for unseasoned investors. If you’re unsure of the best moves to make, consider meeting with a professional financial advisor.