What To Look for When Buying Stocks

Deciding which stocks to include in your portfolio can be stressful, especially if you’re new to investing and have no idea where to begin.

There isn’t a right or wrong way to choose stocks but there are some strategies you can follow to make smarter decisions. Keep in mind that investing strategies vary based on your personal investing timeline and individual tolerance for risk.

One thing you can do is set parameters to guide your decision-making. This can help mitigate emotional purchases.

Erika Taught Me

  • Set a personal financial goal to guide you as you look for stocks to buy.
  • ETFs are a great way to capture returns while limiting the risk your portfolio is exposed to.
  • Look at the P/E ratio, beta, and dividend yield to evaluate whether a company’s stock is aligned with your goals.

. . .

Set a Goal

Before you buy your first stock, make sure you’ve set a goal for yourself. Your goal is a foundation that will help you make objective decisions.

Your goal will likely vary from other investors. You may want to buy and hold, for steady appreciation of your portfolio over time. You may want to generate income from a stock’s dividends. Or, you may want to purchase growth stocks to give your portfolio a chance at growing quickly.

To set your goal, determine how much risk you’re willing and able to take on. A good rule of thumb: You should never invest more than you’re willing to lose.

You’ll also want to consider your investing time horizon. Someone in their early 20s, for example, has more time to recover from market downturns than someone on the cusp of retirement. 

READ MORE: How To Set Your Investment Goals

Open a Brokerage Account

Once you have a goal, you'll need to open a brokerage account to buy and sell stocks.

The type of account you open and who you open your account with will determine what securities you have access to. 

Webull is a popular commission-free trading platform that gives you access to many securities, including stocks and exchange-traded funds (ETFs). But it doesn’t offer mutual funds or bonds, which can be problematic if you have a low risk tolerance and want to invest in safer assets.

If you plan to pick stocks, you’ll also want to look for a brokerage that offers data, charts, and other resources to help you make your picks. While mobile platforms like Robinhood are popular, they don’t provide as many data points as legacy brokerage firms like Fidelity or Charles Schwab.

Choose a brokerage that aligns with your goals and makes it easy for you to execute your investing strategy.

READ MORE: Webull Review: How It Compares for Beginner Investors

How To Pick Stocks

After you’ve set up your account and are ready to begin investing, you’ll want to do extensive research to figure out what stocks to buy. 

You can use a fundamental analysis by looking at a company’s financial documents or a technical analysis by looking at patterns and making predictions about how a stock will behave in the future.

When you’re evaluating individual companies, look at the following data points:

  • Revenue growth
  • Profitability
  • Debt
  • Return on equity
  • Dividends
  • Market share they have within their industry
  • Major competitors
  • Time in industry
  • Industry index (to see how well a company compares to the rest of their industry)

This is important to do for each company you’re interested in because companies are impacted by different laws, regulations, market swings, and macroeconomic conditions. 

Tesla, for example, will be susceptible to different challenges than a company like Coca-Cola. Both can be good stocks to include in a portfolio, but you’ll want to evaluate each company individually before you begin making individual stock purchases.

Once you have a list of companies you’ve researched, get more granular about how they can help you as an investor. Here are a few additional data points to consider.

P/E ratio

The price-to-earnings ratio (or P/E ratio) tells you if a company is a good value compared to other companies in a particular industry. The ratio tells you how much a stock costs compared to the earnings per share that the company generates.

For example, Tesla has a P/E ratio of 46.97. Ford has a P/E ratio of 12.30 and electric competitor Rivian has a P/E ratio of -2.05. 

This tells you that Rivian is losing money and while Tesla costs more to invest in, it’s generated far greater returns than Ford over the past few years.

While the P/E ratio varies by industry, the lower the ratio, usually the better return the stock will provide. 

A high P/E ratio can indicate a stock is overvalued within its industry and that you might be able to get a better deal by investing in one of its competitors. You can usually find the P/E ratio when you look at a stock in your brokerage account.

Beta

Beta is an indicator that tells you how volatile a stock is compared to the rest of the market, benchmarked against the S&P 500.

Stocks with betas less than 1 are considered low-risk while stocks above 1 are considered high-risk. This doesn’t mean you should avoid stocks with high beta but it does indicate risk that you should be mindful of.

When a beta is greater than 1, it indicates that the stock is outperforming the market. Tesla’s beta, for example, is 2.32. Tesla is a popular growth stock to invest in but changing market conditions in the U.S. and rising competition from China puts its continued growth at risk.

Compare that to Coca-Cola, which has a beta of 0.59. This beta suggests Coca-Cola is a much lower risk and can be relied on to be a consistent performer. 

As you build your portfolio, you can look at low beta stocks to balance out growth stocks.

Dividend yield

If you want to use your portfolio to generate supplemental income, dividend yield is very important to pay attention to. Not all dividends are created equal. Some companies offer high dividends but have unsustainable businesses. 

Coca-Cola is a popular dividend stock that Warren Buffet famously has in his portfolio. Its yield is 3.09% and currently pays $0.48 per share every quarter. Other dividend stocks include REITs, which are real estate companies that are required by law to pay dividends.

Whether or not a company has a dividend yield and how high it is can give you an indicator of what a business’s priorities are. You might deduce a company isn’t reinvesting enough or that a dividend is too low to get the return you’re looking for. 

As you research stocks, create watch lists. You can flag stocks as high-risk, undervalued, or revenue-generating. You can also organize your watch lists based on industry or company size.

Use your watch lists to monitor performance over time before you commit to investing in a particular stock.

READ MORE: Investment Terms to Know If You’re a Beginner Investor

Monitor Your Portfolio’s Performance

After you’ve built your portfolio, you’ll want to stay up to date with its performance. 

The easiest way to see how your portfolio is doing is to compare it to the market. You can use the S&P 500 index to gauge how your stocks are performing compared to large-cap stocks within the overall market. 

One of the best ways to ensure you’re always getting consistent returns in line with the market is to invest in an ETF that tracks the S&P 500. An ETF is a slice of top-performing companies — rather than individually picking stocks like Tesla, Amazon, or Facebook, you can purchase a share of an ETF that is invested in these on your behalf.

This strategy can be a good one to adopt as you’re getting started because it takes the stress out of picking the wrong stock. As you become more skilled at investing you can begin picking individual stocks to grow your portfolio.

READ MORE: ETF Investing for Beginners: Choosing the Right ETFs

When to rebalance

You’ll want to monitor whether your portfolio is on track to help you reach your goals. 

At the end of the day, it doesn’t matter whether you beat the market or not. What matters is that you’re putting your money to work in a way that works for you.

If you determine your portfolio isn’t doing what you would like it to do, you can periodically rebalance it

Rebalancing is a process of changing your portfolio’s asset allocation. While it’s common to do this between different types of assets — stocks and bonds, for example — you can rebalance within an asset class as well.

Let’s say you invested in Tesla early on and captured a ton of growth. You’re still invested in Tesla but you are wary about what the future holds. Using beta, you can look for a lower-risk stock (like Coca-Cola) and increase your allocation in that stock. Or, you can trade for an ETF instead to continue giving yourself exposure to Tesla but without all the risk.

READ MORE: Active vs. Passive Investing: Which Is Best?

Tips for Buying Stocks

  • Start small. Never invest more than you’re willing to lose. If you can only afford to invest $10, then invest $10. The key is to get started now so you can benefit from the compounding effects later on.
  • Buy ETF or index funds. These are low-cost ways to fractionally invest in high-performing companies without carrying all of the risk.
  • Look for stocks that’ll perform well in the long run. Growth stocks are popular because they can increase in value very quickly. But with high returns come high risks. Keep an eye out for stocks that have long-term growth potential. Purchasing Amazon in 1998 is a great example of this.
  • Use dollar-cost averaging to stay consistent. Set aside a portion to invest at regular intervals. A stock’s price will average out over time.

READ MORE: How To Build Your Core Portfolio

Keep Learning and Adapt

Picking stocks to buy in your portfolio isn’t easy. Many investors try to come out ahead of the market but it’s almost impossible to do. While you can look for signals in the market to guide your investment decisions, it’s difficult to pick a clear winner all the time.

As you buy stocks and practice investing, you’ll become more in tune with what works and what doesn’t. Over time you’ll know what to look for.

Keep learning and evaluating new strategies to give yourself as many opportunities as possible. You can start by checking out these episodes of the Erika Taught Me podcast:

. . .

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I'm an award-winning lawyer and personal finance expert featured in Inc. Magazine, CNBC, the Today Show, Business Insider and more. My mission is to make personal finance accessible for everyone. As the largest financial influencer in the world, I'm connected to a community of over 20 million followers across TikTok, Instagram, YouTube, Facebook and Twitter. I'm also the host of the podcast Erika Taught Me. You might recognize me from my viral tagline, "I read the fine print so you don't have to!"

I'm a graduate of Georgetown Law, where I founded the Georgetown Law Entrepreneurship Club, and the University of Notre Dame. I discovered my passion for personal finance after realizing I was drowning in over $200,000 of student debt and needed to take action-ultimately paying off my student loans in under 2 years. I then spent years as a corporate lawyer representing Fortune 500 companies, but I quit because I realized I wanted to have an impact; I wanted to help real people and teach them that you can create a financial future for yourself.

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Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. Terms apply to American Express benefits and offers. Enrollment may be required for select American Express benefits and offers. Visit americanexpress.com to learn more.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. Terms apply to American Express benefits and offers. Enrollment may be required for select American Express benefits and offers. Visit americanexpress.com to learn more.