Although the popularity of exchange-traded funds today isn’t as immense back then, rugged and aspiring investors still choose ETFs as their route to investment success. If you’ve taken an interest in building your portfolio and are currently deciding between stocks, you’ll likely know that diversification is the best strategy—ensuring more significant returns.
Here are the golden rules to remember when choosing stocks to make sure you pick the best ones for your portfolio.
Invest in Organizations You Understand
Whether you’re working in a specific industry or have ample knowledge about a particular sector, use it to your advantage and go for stocks offered by businesses you understand. For example, if you work in a factory or are a dedicated handyman, investing in companies like Lakeside Manufacturing is a great way to put your expertise to good use and expand your portfolio.
In contrast, investing in companies that you’re not familiar with and don’t understand can lead to disastrous results. For instance, many startup drug companies may be showing great promise—but most of them are selling on that promise alone. Relying on their confidence alone can be a risky bargain. After all, until they make a breakthrough and start marketing their products, they’re not profitable, and worse, don’t have a cash flow.
Choose Businesses That Dominate Their Industries
There’s a reason why big names like Apple and Facebook surface from time and time again, and it isn’t just because investors get their information from the same sources. It’s because particular businesses dominate their respective sectors, making your job of choosing the best stocks for your portfolio easier. That’s because not only do these businesses have long and proven track records of industry domination, but they’re regularly coming out with new goods that are usually well-received by customers.
Keep Track of Trends in Earnings Growth
Monitoring trends in a business’s earnings growth is a great way to narrow down your stock options. It’s best to see if the company’s earnings generally increase over time. If that’s the case, it’s a great indication that the business is doing something right—and make sure to check for the smallest growth since even the tiniest and regular improvement over time can be a positive indicator. However, remember that earnings growth and value need to go hand-in-hand to determine if the stock is worth the investment.
That’s why evaluating businesses is a combination of understanding how they work and how valuable their future cash flows are, so make sure to check its products or services, target market, and cost structure.
Don’t Overload Investments in Two or Three Industries
Although investing in sectors that you’re familiar with and understand deeply, at the same time, make sure your investment portfolio doesn’t get overloaded with stocks in a small number of niches. For instance, if you work in information technology, it can be tempting to fill your portfolio with tech stocks since it is your specialty. However, remember that no matter how well you understand it in any industry, trends are bound to happen as nothing is consistent in the stock market.
So, just because technology is booming nowadays, that doesn’t mean it’ll last forever. That’s why if you’re planning to hold different stocks, make sure they’re diversified across various industries to increase your ROI.
Go For Business With Solid Track Records
When investing in stocks, it’s wise to go for companies with proven track records. That’s because those with fraudulent or hard-to-obtain documents tend to be scammers and always leave investors with the shorter end of the stick, leaving their investments in vain. Remember, the first rule of making money and building your portfolio is not to lose anything, especially on your initial investments. Although it isn’t the case for all, newer companies tend to leave an adverse outcome to your finances in most cases.
That’s why it’s best to choose a business that’s been around for several years, and the more, the better. Besides years of operations, you need to ensure the companies have a steady track record of increasing revenues and profits consistently.
Don’t Forget to Look at the Dividends
Dividends refer to the return of portions of a business’s profits to its investors, providing an immediate return on investment, meaning investors don’t rely on capital gains as much as other stocks. They’re particularly appealing to income investors, providing some measure of protection during economic fluctuations and market downturns. The best part about investing in stock dividends is that the company offering them is regarded as generally “healthy” and profitable.
That means companies that pay dividends can continue operations and expand while returning some profits to their investors.
Investing in stocks involves making some difficult decisions, but checking off a couple of rules like those mentioned can help you find some of the best picks for your portfolio—ensuring long-term profits and steady cash flow.