Successful investing comes down to buying the right stocks at the right time. The challenge for investors lies in figuring out which stocks to buy and when.
In this guide, we’ll explain how you can define your investing strategy, find potential stock picks, and decide which stocks to buy. How to know which stocks to buy is a complicated topic, so let’s dive right in!
Why Invest in Stocks?
Before we explain how to find stocks to buy, it’s worth thinking about why you might want to invest in stocks in the first place. Knowing your reasons for investing will play an important role in choosing which stocks and opportunities you want to pursue.
For many investors, stocks are appealing because they offer moderate growth and moderate risk. They typically offer greater returns than instruments like bonds, and it’s relatively easy to buy and sell stocks with just a brokerage account.
Stock investing can help you build wealth over time or save up a nest egg for retirement. Since there are thousands of stocks to choose from, they are also opportunities to diversify your investment across industries, countries, risk levels, and more.
How to Know Which Stocks to Buy
Figuring out which stocks to buy requires defining your investment style, finding investment ideas, and analyzing investment opportunities. As you dive into this process, keep one caveat in mind: it’s never possible to know with certainty which stocks to buy. The market is unpredictable, and the best any investor can do is make educated decisions.
Step 1: Define Your Style
There are tens of thousands of stocks to choose from, so the first thing you need to do is narrow your search. The best way to do that is by defining your investment style.
Some factors to consider when defining your style include your investment time horizon, your tolerance for risk, and your desired return. Retirement investors who are planning to invest in stocks for 20-30 years might be able to overlook the risk of a short-term downturn. Short-term investors, on the other hand, will want to focus on how a stock will perform over the coming months.
You can also define your style in terms of different markets. For example, you could focus solely on US companies, or only on companies in emerging markets. You can also focus on large-cap or small-cap stocks, or on stocks within specific market sectors that you find interesting.
No one investment style is better than another – it’s a personal decision that’s unique to every investor. Ultimately what’s important is that you clearly delineate your style and then stick to it when searching for investment ideas.
Step 2: Find Investment Ideas
The next step to finding stocks is to create a list of potential ideas. There are many different ways you can gather ideas, and it helps use multiple approaches to cast a wide net.
One of the best places to start is with market news services. MarketWatch, CNBC, The Street, and The Motley Fool all issue articles regularly highlighting stocks that are experiencing big price movements and could be ripe for investment. Many of these services also offer some commentary to help you decide which stocks are worth analyzing further.
Lists of trending stocks can also be useful. Robinhood has a list of the most traded stocks on its brokerage platform, while StockTwits and Yahoo! Finance track which stocks are receiving the most attention from investors more broadly.
For higher-quality ideas, you can turn to a paid stock research service like Zacks Premium or a stock-picking newsletter like The Motley Fool’s Stock Advisor. These services offer analyst-vetted stock ideas that may be more promising than what you’ll find by simply looking at what stocks are popular. Additionally, right now Motley Fool is offering a discount on your first year of stock advisor, so that may be worth noting.Claim Your New Member Discount at The Motley Fool
Finally, you can use a stock scanner like those offered by Stock Rover or FinViz. These services let you define your investing style using hundreds of fundamental and technical metrics, and offer tools to help you analyze the results.
Step 3: Analyze Your Opportunities
Once you have a shortlist of stocks in hand, the final step is deciding whether or not each stock on that list is worth investing in. There are many different ways to approach stock analysis, and the best approach usually involves a combination of different methods.
One common method is fundamental analysis. This type of stock analysis involves looking at a company’s financial data to determine whether its current stock price is fair and whether it has the potential to appreciate in the future.
Metrics to look at as part of fundamental analysis include a company’s price-to-earnings ratio (P/E), earnings per share (EPS), price-to-earnings growth (PEG), cash-to-debt, and asset utilization ratio. More broadly, you should consider whether a company is profitable, whether its business is growing, and what vision its management has for the future.
You can also evaluate stocks through the lens of technical analysis. Technical analysis looks at how a stock’s price has changed in the recent past to try to predict how the price will change next. Technical analysis is often used for short-term investing and trading, but it can also be used for longer time horizons.
One key thing to consider as part of technical analysis is where a stock’s price stands relative to its recent highs and lows. While there are different technical investing strategies, it’s usually a good sign if a stock is consistently setting new highs and moving upward with momentum. You can also evaluate a stock’s trading volume, which is an indicator of how interested investors are in the stock. Big upward price movements carry more weight in technical analysis if they’re backed by high trading volume.
Conclusion: How to Know Which Stocks to Buy
Knowing which stocks to buy and when is central to successful investing. Start by defining your investment style and then creating a list of potential stocks to buy that fit your style. From there, you can use fundamental and technical analysis methods to determine which opportunities are worth pursuing.
Keep in mind that there’s no single best method for finding profitable stocks. Rather, the right approach will depend on your investment goals and what’s most important to you in an investment.