How to find good stocks to invest in
13:49, 22 May 2020
The Covid-19 pandemic has resulted in a global selloff in stocks but this shouldn’t deter young investors from picking good stocks. After all, the vast majority of investors who made wise stock purchases five years ago are still sitting on an attractive profit.
The 2020 stock market decline from Covid-19 is certainly temporary, although it remains unclear if this will last a few months or a few years. But such are the risks of long-term investing as investors will always experience short periods of volatility followed by years of gains.
Where to invest money
Stocks are far from the only investment tool as investors can buy bonds, commodities, currencies, real estate, physical gold and much more. But stocks are mostly preferred by young investors because finding good stocks is not a difficult exercise. The vast majority of people with minimal investment knowledge are already familiar with companies like Apple or Disney.
By contrast, other investment options are much more complex in nature, such as the dynamics of currency pairs like the Japanese Yen to US dollar or understanding the relationship between oil spot prices and forward prices.
Stocks are also easier to buy because of the advancement of financial technology (fintech) and brokerage firms that cater almost exclusively to young investors. Also, the vast amount of online media outlets makes it a lot easier for investors to conduct their own stock research without pricey membership fees or any other large expenses.
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Do I need a lot of money?
The short answer is no. Choosing good stocks does not require a lot of money, although it requires a good amount of discipline. It is often difficult for new investors to understand the long-term benefits of share picking strategies.
Young people who are new to the workforce shouldn’t be faulted for not wanting to invest in their future and retirement. They worked hard in school to get to where they are and would prefer having fun with their income today.
The most important first step before any stock picking basics is to understand the math behind long-term investing. An investment in a stock that appreciates 10 per cent each year will double in size in approximately seven years. And this process repeats itself over and over and over again.
Suppose a young investor puts away only $1,000 when they are 20 years old after becoming a master of knowing how to research stocks. Here is a very rough timeline of what that money will look like in the future.
Now imagine if instead of investing $1,000 at age 20 the same amount is invested each and every year? The young investor will be well on track to retire a millionaire at the end of their career.
What are CFDs and how to use them?
A lesser-known alternative to traditional stock buying is a contract for a difference (CFD). An investor can buy a CFD on a particular stock but instead of owning the asset outright, you enter a contract to exchange the difference in the value of the stock between the beginning and the end of the contract period.
With CFDs you can profit from rising and falling markets. You can either hold a long position, speculating that the stock’s price will rise, or a short position, speculating that the price will fall.
Another advantage to investors is a much smaller upfront cost, as CFDs are leveraged products. It means that if your CFD trading provider offers a 20 per cent margin to trade Amazon stock, for example, you have to deposit only 20 per cent of the total value of the trade you actually want to open. The remaining part is covered by your CFD broker. Therefore we can assume that CFDs are more suitable for traders, who have limited funds, want to make short-term investments and are interested in leveraged products.
How new trends translate to stock ideas
How to know if a stock is good? You may be thinking this sounds easy in theory but almost impractical to pull off. But it doesn’t have to be complicated and a good stock picking guide makes it easy to understand how to pick good shares.
The best method on how to find good stock investments is to look around you. Go out and identify new products and services a lot of people are starting to use. Think back to 2013 when all your friends started using Facebook – or as it was known at the time as The Facebook.
The company presented a new idea that is today embraced by billions of people across the world. Facebook’s ability to reshape how companies can target their products to consumers gave early and wise investors an incredible opportunity to buy a great stock at a cheap price.
The same holds true for the iPhone. Once upon a time, BlackBerrys and other devices dominated the smartphone market. But Apple started to win over customers one at a time to the point where it expanded to new hardware products and there are now more than one billion devices used across the world.
In short, always be on the lookout for the next Apple or Facebook.
How to find good stocks to invest in
If you can’t find new ideas then you are wondering how to choose good stocks. Not everyone can be experts at identifying new trends, and that is more than OK.
Four of the best stocks for new investors to hold for years, if not decades include:
- Apple. Tens of millions of existing iPhone owners will replace their devices each year. The company continues to diversify its business to monetise existing users through selling services (think App Store) or incremental hardware products like earphones.
- Amazon. The e-commerce company continues to expand in scope and size. Management’s pursuit to improve its business (like buying its own aircraft to save on delivery costs) will result in a dominant market position for many decades to come.
- Chipotle Mexican Grill. The casual fast-food chain is standing out in an overcrowded restaurant space by offering a healthier alternative to calorie-heavy burgers and fries. The company is also expanding at a rapid pace and embracing future trends of retail today, like stores optimised for mobile orders and walk-through counters.
- Dow Jones ETF. Instead of buying an individual company’s stock, an investor can buy an Exchange Traded Fund (ETF) which gives exposure to an entire stock index. The Dow Jones Industrial Average ETF, ticker “DIA”, includes the largest company from each sector. This is a heavily diversified option for investors worried about individual stock picking.
Stay tuned to the latest stock market news, which can give you some tips on choosing the right stock. Track the performance of over 2,000 top-traded stocks live and trade them with CFDs at Capital.com.
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