How to Find Companies to Invest in

How to Find Companies to Invest in

Reading time: 5 minutes

Whether you're an experienced investor or just getting started in the stock market, having the ability to spot promising investment opportunities requires understanding market dynamics and conducting thorough research on companies to find the ones that align with your investment strategy, risk tolerance, lifestyle, and knowledge level. 

7 Steps to Pick a Stock to Invest In

  1. Determine the amount of money you can save and invest based on your personal finances. 
  2. Think about the kind of investor you are.
  3. Identify short-term and long-term investment goals.
  4. Establish what kind of market analysis you'll employ to make your investment decisions. Consider using a stock screener to spot companies that fit your fundamental and/or technical criteria.
  5. Detail your investment strategy in your overall trading plan.
  6. Open a trading account with a trusted broker.
  7. Build your stock portfolio with shares from different activity sectors and countries for increased diversification. In addition to buying physical individual shares, you can also use a range of financial products such as mutual funds, Exchange-Traded Funds (ETFs), and Contracts For Differences (CFDs).

Identifying Companies According to Your Strategy and Goals

With different investment strategies, risk appetite and financial goals come different types of stocks you can invest in, such as value, growth and income stocks. Furthermore, you can also select stocks based on their market capitalisation, such as small caps (small businesses and startups, such as Bubs Australia [BUB, listed on the ASX stock exchange]) and large-caps (blue chips, such as Apple [AAPL] that’s listed on the S&P 500 and the Nasdaq).

Value investing is often used by long term investors looking for under-valued stocks that will potentially rise over the long run once the market realises their worth. These companies are usually rather mature and are cheaper compared to the strength of their fundamentals or compared to their competitors - in other words, their intrinsic value is higher than their market value.

While growth stocks can certainly be part of a long-term portfolio, investors often employ them to capitalise on current upward momentum, as opposed to anticipating future gains like one might with value stocks. Growth stocks are usually fast-growing companies within a trendy or niche market with a strong brand, high barriers to entry and strong growth potential.

Income stocks, also called dividend stocks, are shares that generate cash payouts, usually dividends, allowing investors to take advantage of a relatively reliable source of income. Most of the time, growth stocks do not pay dividends, as they prefer to reinvest their money to support their growth.

Finding Companies According to the Way You Analyse the Markets

The way you pick companies to invest in can vary depending on the way you analyse the financial markets, especially when it comes to fundamental analysis vs technical analysis.

Fundamental analysis gives you a deeper understanding of a company's fundamentals through a thorough analysis of the company itself, its industry, and the overall macroeconomic conditions and prospects to find out its intrinsic value. Finally, you compare it with its current stock price to determine if it represents a buying (or selling) opportunity.

For that, you will need to conduct qualitative and quantitative analysis. 

A company's financial statements like its balance sheet, income statements, cash flow statements, track records, and dividend policy, as well as financial ratios and metrics like the price-to-earnings or P/E ratio, debt-equity or D/E ratio, earnings per share or EPS, and price-earnings to growth or PEG ratio are popular data/metrics used for quantitative analysis.

Qualitative information and factors can include information about a company's business model, management team, brand strength and market recognition, industry trends and competitive advantage, supply chain resilience, customer satisfaction, and regulatory environment.

With technical analysis, your focus is solely on historical prices, current stock price movements, and technical indicators. The goal is to determine the main/primary trend, forecast future price movements, and identify optimal entry and exit points.

Support and resistance levels, trendlines, chart patterns, and technical indicators such as Moving Averages (MA), Bollinger Bands, Relative Strength Index (RSI), Ichimoku Cloud, and Fibonacci retracements are among the most popular tools used in technical analysis.

Bottom-Line: Final Tips for Finding the Right Companies to Invest In

  • Invest in businesses and financial products that you understand.
  • Take advantage of your passion and your expertise for investing in specific industries.
  • Use the resources provided by your broker, specialised stock research websites, or market news for stock opportunity identification.
  • Choose companies that offer a competitive edge over their competitors that will allow them to provide long-term growth (the famous 'economic moat' popularised by Warren Buffett).
  • Watch out for red flags and be aware of unrealistic returns offered by companies, as it might be a scam.
  • Beginners often like to get investment advice on financial planning, so if you're a new investor you might want to talk to a financial advisor before you start investing in stocks.
  • Remember that past performance isn't a reliable indicator of future performance.
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