Stock picking is by no means an easy game of chance, rather more of an artform. Stock picking is a complex process composed of many different domains of analysis. This guide is for the beginner stock picker who is looking to calculate the intrinsic value of a company before diving into the numbers.
Before you Google ‘Best Stocks of 2018’ in the search of the golden stock, companies that you are already aware of are the best investments for you. For example, if your local retail store sells good quality products for a great value, there is a good chance that it might be a good company to invest in. The reasoning behind this theory is that, if YOU the consumer approve of a certain product/service then theoretically it is reasonable to assume that other consumers, like you, do too. If consumers like a product/service, the profit is more than likely to increase. However, note that not all retail businesses you shop at are public companies and that there are many more factors, other than profit, that contribute to a rise in share price, but this could be a good indicator of a solid company.
For starters, you want to understand what the company actually does, if you have no clue what a company’s purpose is then surely it would be irrational to invest in it’s stock. Understanding the inner workings of a company is useful when major changes occur. Your knowledge can help determine whether certain changes will have a positive or a negative impact on the business and thus may help you make more intelligent investment decisions.
A good company often has a competitive advantage: something unique that sets them apart from the rest of the players. Competitive advantage can lead to companies dominating other businesses in the same industry. This eliminates the threat of competition allowing flexibility on factors such as: pricing. To exemplify, Apple and Samsung’s domination in the mobile & smartphone industry allows them to sell their smartphones for a premium price while still maintaining a high level of demand, which increases revenue and is one of many reasons why they are both solid companies.
Another indication that a company is in good standing is it’s management. To see if a company has good management you can check experiences, achievements and past roles of it’s current executives. These executives can be the CEO, CFO, COO, CMO and etc. Most executives in a company should hold shares of their own company too. This ensures that the management is working as hard and efficiently has possible to better the company because they benefit financially from a rise in share price. Therefore, in most cases, it is beneficial for the investor that the owner of the company holds a portion or a majority of their company’s stock. If a CEO of a big company owns no shares of its own company and is always on the news for DUIs and drug abuse it may not be the smartest decision to invest in that company.
Additionally, the customer base of a company is also imperative. If a company relies on one small demographic of customers for its sales, this could prove to be devastating when consumer preference and behaviour takes a shift. A good company should have a large and diverse customer base.
Companies that are heavily influenced or restricted by regulation, in some cases, should give off a red flag. Regulation may influence prices, increase expenses (due to fees or taxes) or most drastically, hurt the overall image of a product, service or business that is under heavy regulation. Mandatory warning labels on cigarette packaging played a major role in the shift of the social attitude towards smoking, hence the decline in tobacco sales over the past decades. This illustrates how big of an impact regulation can have not only on a business, but on a whole industry as well.
These are just a few things to keep in mind when looking for a winner company to invest in. Readers should note that the realm of stock picking is much bigger than the confinements of this article. However, this is a good starting point for any beginner interested in getting into the game or just to learn a new thing or two about stocks.
You may also be interested in: Introduction to Forex
Writer: Shervin Ghaffari
Disclaimer: All investing can potentially be risky. Investing or borrowing can lead into financial losses. All content on Bay Street Blog are solely for educational purposes. All other information are obtained from credible and authoritative references. Bay Street Blog is not responsible for any financial losses from the information provided. When investing or borrowing, always consult with an industry professional.