How do I start choosing what to invest in?

How do I start choosing what to invest in?

There are a lot of variables in play when trying to choose a stock, below is a framework that could help guide you in choosing stocks

Your goals and timeline → Industry you like and believe in → Companies that are leading in this industry → Company health → Evaluate and assess

Goals and timeline:

First, as we covered in the #before investing you should section, the first step is to remember your goals and timeline. This will help you choose the right stocks to help you achieve your goal. For example, you want an income play, so choosing stocks with very low dividend distribution doesn't make sense.

Industry you like:

We all have industries that we like and believe in. Even if you think you don't, you do! This could be derived from your professional or personal experiences. For example, if you use e-commerce for every item you need, and you believe it will continue to be that way in the future, then this might be an industry you like or believe in. It's important also to research the industry after you picked the one you like, look at the trends that move the industry, the latest news, and movements, etc...

Companies that are leading in this industry:

Now that you picked the industry you want to invest in, it's time to shortlist the companies you want to invest in. When choosing companies you can either look at leading companies with the highest market share, companies that are distributing the industry, or companies that are doing well and are undervalued. Ultimately based on your goals (for example growth investor vs income investor) and the company's health you can shortlist a company or two you can do further research on and choose. Again it's important to keep up with the company news and trends.

Company Health:

When looking at a company's health there are a lot of factors to look into. But some of the important considerations are:

  • Board and management team: Do the board and management have strong experience in this industry? Are their backgrounds aligned with the direction of the company? How's the turnover at the company? Does it have a stable management team? How's the culture? These are some of the questions you might want to go over.

  • Financials: Let's take a look at the numbers 🤓:

  • P/E ratio high or low? Generally, a lower ratio is better.

  • Debt: how much debt do they have? Is it sustainable?

  • Free cash flow: How much cash does the company have? Generally the higher the better.

  • Gross profit: shows if the business is net positive at the most basic level - are they selling products and services more than the cost to acquire or to deliver these products and services?

  • Operating income: is gross profit - operating expenses. Shows if the company is generating enough to cover necessary expenses to operate.

  • Net income: the BOTTOM LINE 😆  after accounting for all expenses in the business is it positive or negative?

    Now that we looked at some numbers, it's important to also look at the trend. What's the growth in each? Is it increasing at a sustainable percentage? Are revenues increasing at a higher percentage than costs?

  • News and analysis: it's important also to look at recent news and announcements related to the company that is not necessarily captured in the company's financials.

  • Consumer and public opinion: are the customers happy about the product? You can check forums and blogs related to the company to get a sense of the sentiment within its customers. These insights can help you with your overall analysis.

Evaluate and assess:

Once you picked a stock and invest it's always important to keep up with the company's performance, industry trends, news about the company and industry, earning calls (you can attend through InvestSky's platform 😉 ), and general market performance.

It's also important to evaluate your overall portfolio, are you diversified? Are your investments aligned with your goals?


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