Best shares to buy for beginners: How to pick a stock
The stock market is arguably one of history's most powerful investment vehicles. Thousands of companies across the world list their equity on stock exchanges, and rapid technological advancement made buying stocks accessible to retail investors, who now can enter the markets in a matter of minutes.
However, the vast amount of information available online and the many strategies promoted by professionals may become overwhelming for those who are new to investing and trading.
Here we take a look at popular techniques used to find stocks to buy for beginners. While any method would have its risks and opportunities, they may serve as a starting point for those taking their first steps on their stock market journey.
How to use charts and technical indicators to find stocks for beginners
Technical analysis involves using stock price and trading volume data provided by exchanges to determine which direction the price could take in the future. Even though these assertions are far from certain, some trading systems that employ these techniques have managed to produce sufficiently high win rates. There is, however, always a risk of loss.
The most popular technical analysis tool to find good starter stocks is charting. This activity consists of analysing the historical price trend of a stock during a certain period to estimate which direction it may take in the near future.
Note that technical analysis is typically used for buying and selling stocks to speculate on short-term price volatility, rather than for holding them long term.
Charting experts typically seek to identify patterns that have a high probability of preceding a certain outcome such as the Head and Shoulders, Cup and Handle, and Rounding Top patterns. They do this by studying different time frames going from one-minute for high-frequency trading, to hourly for day trading, and daily or weekly for swing trading.
Meanwhile, technical indicators have also been created by using stock price and trading volume data such as the Relative Strength Index (RSI), Moving Averages (MA), Moving Average Convergence Divergence (MACD) and Bollinger Bands.
These indicators generate buy and sell signals for a stock so traders can use them to operate in the markets. The reliability of these signals can be analysed via back-testing to determine how accurate a trading system has been and could be.
A potential way to select starter stocks is to use a screener that allows to filter instruments based on the value of a certain indicator. One example of a technical filter would be “stocks whose RSI is equal to or higher than 70”. The choice of indicators and their use would depend on the trader’s preferences, strategy and research.
How to research stocks for beginners using fundamental analysis
Fundamental analysis involves evaluating a company’s financial statements and balance sheet to determine how much the business is worth – also known as fair or intrinsic value. By doing this, investors can identify if the market price of the stock is attractive enough to buy.
Some of the metrics used to analyse a company from a fundamental perspective include profitability, liquidity, solvency, operating, and valuation ratios. These ratios use data contained in the company’s financial reports or provided by the exchange where the stock trades.
Some of the most popular metrics used in fundamental analysis include:
Profit margins: gross, operating, and net margins
Historical revenue and earnings growth: quarterly, interim and annual
Debt-to-assets and debt-to-equity ratios
Quick ratio and acid-test ratio
Price-to-earnings and price-to-book ratios
Return on equity (ROE)
Analysts who use fundamentals to determine the value of a company may also focus on the qualitative aspect of the business such as the market share of its key products, the strength and experience of the leadership team, brand positioning and other similar factors.
Stock screeners can be a useful tool to identify equity instruments that comply with the investors’ criteria, for example, to obtain a list of stocks trading at a certain price-to-earnings ratio. The list can be used to locate good stocks to invest in for beginners as their valuation may be appealing in relation to the company’s earnings-generation capacity.Investors can also use valuation ratios to determine growth and value stocks.
Using analysts’ ratings to find best shares to buy for beginners
Financial companies that provide stock analysis tend to provide stock recommendations (buy, hold or sell) and 12-month price targets.
These ratings can be used to find stocks for beginners as they reflect Wall Street’s sentiment and analysts’ views of a stock. That said, it is important to look beyond the recommendation alone.
First, the number of analysts who are covering the stock is something to consider. If the number is low, it means that the consensus recommendation may rely on too few opinions to be reliable. The higher the number of opinions, the better.
Analysts’ price targets may too help in identifying the best stocks to invest in for beginners. Ideally, the market price should be much lower than the average price target as that provides some margin of error for the investment and increases any upside potential.
Note that analysts’ predictions can be wrong and shouldn’t be used as a substitute for your own research.
Tactical portfolio allocation to identify good beginner stocks
Company stocks can be categorised depending on their nature, how they generate money, where the company is located, or which industry the business belongs to.
Tactical portfolio allocation is a methodology that consists of investing in stocks that share similar characteristics. For example, investors could opt to pour money into mining companies, which are businesses that specialise in the exploitation of minerals and precious metals. They could also opt to invest in Chinese stocks or companies with corporate practices considered socially responsible – also known as ESG investing.
They can do this by either hand-picking the stocks that meet this criterion by themselves or by buying exchange-traded funds (ETFs) or mutual funds that provide exposure to specific categories of stocks. The benefit of this method is that it simplifies the process of picking stocks for beginners as investors can rely on diversified vehicles instead of having to do the heavy lifting.
Final thoughts
With so many options, picking the best shares to buy for beginners could be an arduous task. However, using some of the strategies mentioned above may make it easier for new investors to find good starter stocks.
We encourage you to always conduct your own due diligence before trading and have a sufficient risk-management strategy in place. Remember, past performance does not guarantee future returns. And never trade money you cannot afford to lose.
FAQs
How to get started with stocks?
You should first conduct your own due diligence on the stock market, familiarising yourself with different strategies and instruments to invest and trade.
How to analyse stocks for beginners?
The four potential methods to analyse stocks for beginners are technical analysis, fundamental analysis, analysts’ recommendations and forecasts, and tactical portfolio allocation. Always conduct your own due diligence before trading.
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