Things To Consider When Selecting Stocks To Invest In
If you're a little confused about which stocks to invest in, especially given the current climate, you're not alone. While the specifics of your purchasing and investment strategy will need to be based on your personal circumstances, there are some basic rules to follow that will help you have the best chance of selecting the right stocks to invest in. Read on to discover them:
Your Strategy
The first thing you'll need to consider is what your strategy is going to be. Establishing whether you be aiming for swift capital growth with a day trading approach, building a set and forget portfolio for long term gains or going for a mix of the two will make it a lot easier for you to select stocks to invest in so it should always be your first port of call.
P/E Ratio
It is also important to consider the P/E ratio of any company you are considering when choosing which stocks to invest in. P/E ratio stands for price to earnings and simply compares the company's earning per share (and by extension, the profit you're going to make off each share) against how much it costs you to purchase a unit. You'll ideally want this value to be as low as possible in order to make the most gains.
Portfolio Diversification
Next up you're going to want to think about portfolio diversification. Having all of your funds tied up in shares in a single company is a recipe for disaster so it's important to select a varied collection of stocks to invest in. Ideally this will include both local and international companies with a spread across industries so you don't take too much of a hit if a particular industry does. You'll need to balance this carefully, however, as spreading yourself too thin can impact your profit margins.
Dividends
Dividends are a great way to make passive income from the share market and any good portfolio should have at least one or two dividend paying components. As a general rule, we suggest gearing the majority of your portfolio towards dividend earning shares when selecting stocks to invest in for a long term strategy to take advantage of dividend reinvestment plans and compound interest. Please note that the specifics of how this plays out will depend on your personal circumstances so it is always a good idea to seek tailored financial advice.
Tax Implications
Finally, there's no point making a whole lot of money in the share market if the majority of it is going to go to the tax man. In Australia, holding a share for more than a year can greatly reduce your capital gains tax obligations so it is a good idea to consider whether you're happy to hold for this long when choosing stocks to invest in. This obviously will not apply to those who choose to day trade or take a short term approach to their selection of stocks to invest in, but as the general recommendation is to hold shares for a minimum of two years, this advice is sound for most people who will be getting into the market.
While these considerations will help you form a solid foundation on which to begin your investment journey, all points in this article are general in nature. We strongly suggest meeting with a professional financial advisor to help you understand what is best for you on a personal level when selecting stocks to invest in, and it is highly advisable to keep them in the loop any time you wish to make changes to your portfolio.
This is general information. Obtain advice from a licensed finance professional before making investment decisions
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