In reality, when you come to invest, the first question that pops into your head is where and how do I invest.
If you were to choose the stock market as to where you’ll invest, you’ll be faced with one critical question: which stock should I buy?
The reality is, some people possess the experience and knowledge regarding many of the companies available to invest in and they can generally identify a good stock investment opportunity and which stocks are not all that.
What if I don’t have their experience? What guidelines do I choose a stock based on?
I’ll tell you:
1- The first thing you look at is the P/E ratio (price-to-earnings ratio).
The P/E ratio is the current stock price divided by the EPS (earnings per share). The smaller the P/E ratio is, the better.
If you find a stock that’s currently trading at EGP 4 and has a P/E ratio of 2, that means that the stock price is twice the earnings per share of the stock.
2- The second thing you look at is the fair value of the stock (fair, overvalued, undervalued).
If you’re a beginner, there are analysts who analyze companies’ financial statements and give them a certain valuation, or fair value. If, for example, a company’s fair value was set at EGP 25 per share and the company is trading at a higher price than that, then the company is overvalued.
3- For every investment, there is a possibility of profit and with that possibility comes risk. In finance, it is common knowledge that high risk = potential high reward, and so one thing you need to look at is your risk appetite.
You need to be able to have patience and not panic if you lose a percentage of your money and blindly invest in other stocks to make up for the loss.
The main point of this element is to not buy high-risk stocks without analyzing whether they have the potential for high returns.
4- The fourth thing you should look for is how liquid the stock is.
One of the stock exchange’s biggest perks is that investments are much more liquid than other investments. However, some stocks do not have a lot of volume of trades, making it more difficult to sell the stock on command.
A stock’s liquidity is determined by traded value. Some stocks have traded values in the hundreds and others in the millions.
5- Always try to look at the company’s financial statements yourself and learn the nature of its work so that you are able to understand what effect economic or political changes and pressures have on the company.
In conclusion
Never put all your eggs in one basket.
Diversifying your investments is very important. Invest in several different industries like banking, energy, tech, healthcare, etc. This will protect you from the risks associated with one industry, and will help you avoid substantial losses.
This was not written by Thndr and this is not investment advice, you should do your own research before making investment decisions.
