If you’re reading this, you must be part of that 32% of people who really care about their financial stability. We also know that if you’re here it is because you’re looking for ways to put your hard-earned cash to work, especially in the stock market. However, what’s behind that decision of investing your money? And most importantly, what are the best stocks to invest in according to your financial situation?
Investing in the stock market is not about just bidding for the stock that seems to get good results. Actually, finding the best stocks to invest in is a process that starts at checking a set of personal factors to assure your choices are the most appropriate according to your economic situation.
Don’t worry though. It doesn’t have to be a difficult task. Here you’ll find some tips that will help you along the way.
Identify your economic situation
First things first. Before getting into the market on the look for the best stocks to invest in, it is important to understand how things are at home.
As a first step, it is necessary to analyze the status of your personal finances. You can start by implementing a budget strategy (such as the well-known 50/30/20 rule) to locate your sources of income, evaluate your expenses and plan your debt payments. This is a primordial step to identify the amount of money you can put into your investments every month.
Before going into the market
After you get your personal finances in check and know the amount of money you can invest, there are certain aspects to consider before going into the investing phase.
Define your investor profile
Once you know and understand your personal economic situation, it is time to define the level of risk you will feel comfortable taking. Would you rather play it safe? Or maybe you’re willing to risk a little more looking for greater gains?
Every financial instrument, even the stocks of the best companies, carries a level of risk when you invest in them. This corresponds to the different investor profiles. For instance, while a ‘conservative’ investor would look for investments with low but steady profitability, a ‘dynamic’ investor would always go for investments with much higher gains without caring that much about the risk of getting losses.
Define your investment plan
You’ll never know where you’re going if you don’t trace a route first, right?
Before looking for the best stocks to invest in, you’ll need to identify the goals you’re looking to achieve with your investments and the time period it will take. In this way, you’ll be able to evaluate different stock combinations and determine the amount of money you’ll have to invest and for how long.
For example, if your goal is to build a portfolio for the long run, you can opt for investing in growth stocks that keep increasing in value over time. On the other hand, if you’re looking to generate an extra source of income, you can invest in stocks that pay you dividends every quarter.
Looking for the best stocks to invest in
Now that you’re clear on your economic situation and your investment goals, here’s where it gets interesting. It is time to start the quest!
It is relevant to keep in mind that there’s not a one-size-fits-all solution; the best stocks to invest in will be different for every investor according to their risk tolerance, investing goals, and some other factors. However, feel free to apply these tips to ease your search.
Invest in what you know
To identify the best stocks to invest in according to your goals, you need to know a thing or two about the companies you’re planning to put your money into. The great investor Warren Buffett recommends never investing your money in a business that you don’t know.
This doesn’t mean you need to be an investment-expert all-savvy economist, you just need to know a couple of things about how to value the stock of a company. To do this, you can use these simple metrics:
- Earnings per share: The EPS ratio is calculated by dividing the net income of the company by the number of common shares in the market. This is a useful measure to compare two companies. Remember, a greater EPS means more profitability.
- Dividend yield: In case you’re looking at dividend stocks, calculating the dividend yield may help to compare stocks and check the status of the companies you’ve invested in.
- Dividend payout ratio: This metric is a percentage that shows how much a company is paying its shareholders in form of dividends. You can learn more about this tool in our blog post.
Another option to know more about the companies and markets is to join investor online communities. If you do a quick search on Reddit or Facebook, you’ll find several groups of investors who share relevant news and useful tips to invest in the best stocks.
Diversify your investments
Keep in mind that looking for the best stocks to invest in is not a matter of aiming at just one company. You can find several options that can be a good fit for your investing plan.
Think about this… What would have happened to your investments in the midst of the COVID-19 pandemic if your entire portfolio had been made up of only airline stocks? Your finances would have taken a low blow! It would have been better if, additionally to airline stocks, your portfolio would have been diversified with some tech stocks, some other healthcare stocks, and a couple of stocks of finance companies.
Diversifying your investments is all about reducing risk by including in your portfolio some stocks that could compensate for the losses when some others are going through a drought.
The takeaway
Learning to identify the best stocks to invest in is a process that needs practice… A lot of practice! Nevertheless, it is not something that you need to worry about; as long as you implement these tips, you’ll be able to find some new and exciting opportunities to put your money to work.
Also, don’t forget to check our FlexAcademy blog frequently. You’ll always find some useful information about the markets and practical tips to become a successful investor.
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