Learning to invest-Researching Stocks the Smart Way

As a follow up to my rant a few weeks ago about women not investing, I figured I should put my blog with mouth is and at least have some simple instructions on how to get started.

I am not a financial planner by any stretch of the imagination, but I have common sense and a somewhat informed sense of the basics. So please don’t sue and do your own research before you hand over your money to anyone. I am not promising that you will learn how to pick stocks or learn how to invest by reading this series. I am promising that it will give you the basic overview if you have never thought about going at it alone. Learning to invest isn’t difficult, it just requires patience and a bit of time to sit down and research.

But before you start picking stocks,  you should figure out your financial situation. I am hoping that if you are reading a personal finance blog, you have some inclination to either assess, or fix your financial situation. I am sure everyone knows that already. Today we are going to focus on picking stocks.

Although many people are aware that investing a portion of their savings is one of the best ways to achieve financial freedom, they don’t know how to get started. The first step to investing is learning how to perform due diligence when it comes to picking out companies and stocks to invest in. After all, the point isn’t to lose money before you even get started. While this isn’t a fast, easy task, the process can be sped up by doing market research through your TD E-series account, which offers full access to independent research reports. As you can tell, I really believe that the E-Series is a great beginner tool.

That being said, it’s important to remember that nothing is guaranteed in investing – and there’s always the potential to lose a lot more than you started with. This is why it’s vital to learn how to research stock companies and make your own predictions.

What to Look for in a Potential Investment

In a nutshell, you will be using the following criteria to drill the list down into a smaller pool of stocks to choose from:

  1. Price-to-earnings ratio
  2. Overall earnings growth
  3. Dividends

Remember, there’s more to investing than just comparing the above three figures – you’re going to want to take a look at the overall picture once you’ve narrowed your choices down, including, but not limited to, the market cap, relative strength and the company’s return on equity, as well.

Additionally, you will also be looking for the following:

  • Are the stocks private or public? Before going any further in your research, make sure you determine if the company’s shares are public or privately owned. The difference between the two is huge, and you most likely won’t find very many private shares to invest in. In order for a person to purchase private shares, they have to be invited by the company. On the other hand, a public share is one that anyone can invest in without invitation. Hershey’s Chocolate is a good example of a company with public shares.
  • Is the company buying back shares? A company that buys back shares, and thus reduces the pool of investors, is showing a sign that it cares about its shareholder. Think of it this way: the fewer shareholders there are, the more money you get back on your investment because there are less people to share with.

In order to narrow down your choices even further, you will then need to pick apart the company’s cash flow statement, income statement, and balance sheet – all of which are available through an online TD E-series account. These will give you a better picture of their stability, like their earnings and revenue growth, as well as any outstanding debt that they have incurred.

Characteristics of a Bad Investment

While investing in stocks should always be looked at strategically, and definitely not as a guarantee, there are a few signs that immediately point to a poor investment choice. As a general rule, you should try to stay away from a company that doesn’t work toward increasing the amount of money each share holder receives. Additionally, if they don’t have a long track record, then you should probably sit back and watch to see how they do before dumping a lot of money into shares.

Is there an evergreen market demand for the company?

The worst type of investment that many beginning investors fall into the trap of making is referred to as a “passion investment.” This means that are solely choosing to buy stocks from a company because they know or like the brand. Although there’s nothing wrong with being a loyal customer, this is definitely not the way you want to throw around your investment capitol. You should always make sure that the company you are looking into has products or services that are something that people will always be in need of. Or in other words, their products are considered evergreen. Additionally, does the company have future plans for more useful product or service lines? RIM would be a great example of this. Consumers lose confidence in a company when they notice that the level of innovation  is stagnant, thus the share prices drop.

The most important thing to remember about investing is that it isn’t a means to instant riches. Instead, by investing your money smartly, you are slowly building up an investment portfolio that will hopefully be able to carry you through retirement.

However, before you jump in and start picking out stocks for your newly opened TD E-series account, it’s a good idea to learn more about investing through something called a mock portfolio – which we’ll talk about in the next article.

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Comments

  1. says

    Another sign of a bad investment: insider trading. At popular sites you can see what the top people who work at a firm have been doing lately. If they’re all selling, buying is a bad idea.

    Sweet new logo, by the way.

    • Marissa says

      I find that most people do that. Even if you don’t invest in individuals stock, I think its a great idea to atleast understand whats going on.

  2. Hunter - Financially Consumed says

    Right now I’m leaving the stock picking to my retirement fund administrator. I simply don’t have the time to dig too deeply into financialls, I’m happy to outsource this. I dabble here and there, but the bulk of my savings is managed by professional stock-guessers.

    • Marissa says

      This is one of the reasons I love index funds. Everything in a neat package, but I want to know what the background is as well.

  3. says

    Solid advice. I knew nothing about stocks when I started investing, and it’s totally been a learning-by-doing experience. So far it’s going fairly well with the odd mistake (but I haven’t crashed and burned yet so I’m trying to stay optimistic).

    I hear nothing but good things about the TD E-Series funds, but I don’t have them for myself yet. Maybe when I have more money ;)

    • Marissa says

      TD E-series is a pain to set up but pretty easy to handle after. Its a pain to try to get your money out as well.

  4. says

    I would like to bring to everybody’s attention that invests in value stocks. Their is one overwhelming fact when it comes to value investing and that is you must buy decent companies with very low price to sales ratios to have a high probability of making a lot of money buying value stocks their is no other way believe me. And what is a very low price to sales ratio. First let me explain very clearly to everyone what a low price to sales ratio is. The price to sales ratio is the market cap of a stock compared to the sales that the company of the stock does on a annual basis. In other words the company I talk about below has a market cap’ which is all the shares of the company issued and outstanding of just eight billion dollars. But the comapny does fiftyfive billion dollars in annual sales. In other words the market is valuing bunge at just eight billion dollars but the company does fiftyfive billion dollars in annual sales get the idea. Ok one other thing never forget this warren buffett could never have made the enormous returns buying value stocks unless he was buying value stocks with very low price to sales ratios period’ and I am almost certain if you asked him he would totally agree. Bear in mind I would not say something that I cannot back up believe me. I will give an example of a company of really decent quality that I consider really undervalued. The company is Bunge Limited symbol {BG} engages in the agriculture and food businesses worldwide. The stock currently trades around 59 dollars a share. I think the stock could easily get to 450 dollars a share over the next five years. Yes you heard it right four hundred and fifty dollars a share. Assuming their are not stock splits. And what do I base this on If the companies profit margain expands from around 1.75% to 4% over the next five years and if the sales of the company expand from 54 billion to 85 billion thats growth of about 7 or 8 percent a year and if the companies stock than trades at a price earnings ratio of about 20. That would put the price of the stock at 450 dollars a share. It could even be more than 450 dollars a share if you reinvest your dividends the company pays a dividend also if the company does a share buyback this could increase the value of the stock even more. Keep in mind that their are stocks that are popular that trade at much higher price earnings ratios than 20 times earnings one example is whole foods market it currently trades at 35 times earnings. Also keep in mind that bunge is a company of really decent quality not at all a high risk stock. It has the potential to leave a company like proter and gamble in the dust. I understand your skepticsm if you are reading this but go to any stock broker or financial planner CPA that knows how to value stocks and they will confirm everything that Im saying here.

  5. says

    I think another mistake is investing in just one industry instead of being spread across multiple industries and companies within those industries.

  6. J Raymond says

    These are really good criteria, IMO…nicely written Marissa. A couple of other company metrics I highly value when searching for good investment targets is Cash Flow relative to Price (or P/FCF) and the Debt-to-Equity ratio – more specifically, the liquid assets to long-term debt ratio (can they pay it off and still add something for the shareholders’ pockets). Cash can be a better indicator than earnings for some companies, especially the ones that have high maintenance capital expenditures – these will not show on this year’s income statement, but are still real outflows of cash that are not directly available to the owners. And for me, having a comfortable debt-to-equity situation just lowers the risk for the company in its ability to sustain short-term shocks as well as be flexible if opportunities arise.

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