For many investors, a good stock is one that appreciates in price.
This notion makes many new or amateur investors think that there is only one single answer for whether a stock is good or bad.
If a given stock or company is good for one Investor, somehow it may not be good for another Investor.
A good stock is subjective based on:
Investor’s risk profile.
Investing goals and,
Never assume the idea that a stock’s performance viewed in hindsight makes it good for you to buy.
For instance, you may buy a single stock and that position rises 10 times in less than a month.
But when you do an analysis of the company, you find that the company has a negative Earning per share, high debt, and no Free Cash Flow.
As a value investor, this is not a good stock. Because, it’s too risky and a disaster.
It was likely luck that made the stock to rise so much, and had nothing to do with being a good stock.
How do you determine which stocks are good to buy?
To determine whether a stock is good for you to invest in or a bad stock to avoid, the rule of thumb is, know yourself.
There are three things to consider as an investor when looking for a good stock to buy;
o Knowing your risk profile while investing. o Understand your investing goals – what do you want to achieve? o Know your Investing timelines – How long can you hold on that asset class?
If you go to the market with a strategy; to just buy one stock and hope that one pick turns into gold, that is not likely to be true or to happen.
So, let us explain these in detail and understand this concept.
1. Know your risk profile.
When you are investing, either in the Stock Market, Real Estate, commodities etc. Risk will always be on your plate.
As an investor, the key to successful investing is basically understanding and managing risks in a manner that is suitable or proper in the circumstances.
The most common investing risk is the danger that your investment will lose money.
Your investment can be affected by different types of market risks.
It is very important to understand the different market risks that exist.
Interest rate risk,
Currency risk and
Before you consider a stock as a good investment to buy, it is very important to contemplate;
How much risk are you willing to take?
How prepared you are to lose part, or all of your capital invested
Are you in a capacity to make good from any losses incurred?
Your risk appetite will always differ according to your investing objectives. Whether you are investing for long term or short-term goals.
The goal will affect your risk appetite and also, will influence which good stocks to buy.
So, the next time you consider a stock being good, remember to remind yourself your risk appetite
2. Understand your investing goals.
When Choosing the right investing goals, many of the most recent waves of market participants usually get overwhelmed.
Investment goals are personal.
These goals will influence;
Which asset class to invest in.
Which strategies to use.
How much return you want from the investment.
How long you will want to sustain the investment.
It is a lot difficult to accomplish goals when you cannot anticipate the future, no matter what you are trying to achieve.
Having clear reasons or purposes for investing is critical when choosing the best stocks to buy.
Investing to achieve your financial goals may involve a combination of long-term and short-term investments.
For instance, if you are investing in the hope of financing your children’s education in 18 years, you will probably be looking at longer-term instruments.
If you are investing to buy a TV set in the new year, you may want short-term investments that somehow pay dividends.
3. Know your Investing timeline.
As an investor, understanding when to use long-term and short-term investing plans is part of growing your investments in a manner that helps you attain your investment goals.
So, what is the difference between long-term and short-term investment?
Long -term investments are those asset classes that you plan to hold for more than one-year e.g., 2,5, or even over 10 years.
On the other hand, short-term investments are those asset classes that you plan to hold for one year or less.
It is very important as an investor to keep in mind the difference between long-term and short-term investments.
Long term investing is actually better and simultaneously requiring less of your time.
Instead of thinking about day-to-day fluctuations in stock prices or quarterly earnings reports, you can be focusing on a business competitive advantage.
There are primarily three reasons to be a long-term investor.
It’s highly effective and is very likely to result in meaningful wealth creation over a long run.
It requires way less of your time – freeing from constantly watching the market for small fluctuations in stock prices.
It results in lower fees and allows you to defer capital gain taxes indefinitely. The money is retained in your account compounding on your behalf.