{"id":1016220,"date":"2021-09-24T15:55:53","date_gmt":"2021-09-24T19:55:53","guid":{"rendered":"https:\/\/www.fool.ca\/?page_id=1016220"},"modified":"2023-04-19T10:42:21","modified_gmt":"2023-04-19T14:42:21","slug":"how-to-pick-stocks-wisely","status":"publish","type":"page","link":"https:\/\/www.fool.ca\/investing\/how-to-pick-stocks-wisely\/","title":{"rendered":"How to Pick Stocks Wisely"},"content":{"rendered":"\n

Let\u2019s be real: picking stocks wisely can be intimidating. After all, no one likes to have \u201cbuyer\u2019s remorse\u201d when a seemingly good stock pick plunges into the red. <\/span><\/p>\n\n\n\n

Some might say losing money on stocks is just a part of the game. That\u2019s somewhat true. But far from being a <\/span>guessing<\/span><\/i> game, picking stocks wisely involves analysis, strategy, and some sound investing principles. With the right method to evaluate stocks, you\u2019ll find yourself saying \u201cno\u201d to bad deals far more often — and saying \u201cyes\u201d to those valuable opportunities that others overlook. <\/span><\/p>\n\n\n\n

How can you pick stocks wisely? Below, we\u2019ll help you start evaluating stocks. <\/span><\/p>\n\n\n\n

How to evaluate and pick stocks <\/b><\/h2>\n\n\n\n

Unless you were born with a knack for picking valuable stocks<\/a> (aka, Warren Buffett<\/a>), you\u2019ll have to learn how to \u201csee\u201d them. While a lot goes into professional stock picking, these six steps will put you on the right track. <\/span><\/p>\n\n\n\n

1. Start with companies you understand <\/b><\/h3>\n\n\n\n

Peter Lynch, Warren Buffett, Ronald Reed — history\u2019s most successful investors have amassed millions (billions even) on the basis of one simple principle: invest in companies you understand, and avoid those you don\u2019t. <\/span><\/p>\n\n\n\n

It\u2019s common sense, right? As a <\/span>beginning stock investor<\/span><\/a>, you will have a far easier time evaluating companies whose products, business model, and industry you\u2019re already familiar with. If you\u2019ve worked in IT your whole life, you\u2019ll most likely have a deeper intuition into certain tech companies than, say, retail companies. Conversely, the person who works in retail will probably make a better retail investor than a techie, simply because they have personal knowledge of the retail industry.  <\/span><\/p>\n\n\n\n

That doesn\u2019t mean you have to limit yourself to companies you\u2019re already well informed about. If you\u2019re curious (or downright obsessed) with a certain industry, say, green energy, your interest may motivate you to learn more about each company, helping you pick a great stock. <\/span><\/p>\n\n\n\n

But don\u2019t just invest in companies \u201cjust because.\u201d That\u2019s how you lose money. If everyone tells you to invest in a company that manufactures semiconductors<\/a>, but you have no clue, nor interest, in what a semiconductor does, you\u2019re probably not going to make an informed buying decision. Unless you\u2019re willing to put in the time to research and learn about the semiconductor sector, you might be better off skipping it. <\/span><\/p>\n\n\n\n

So, as a starting point, invest in what you know. Look at your hobbies, areas of expertise, and the products you\u2019re already buying. Somewhere in that mix is a great company for you to invest in. Now, you just need to dig a little deeper to find out which is the best long-term investment. <\/span><\/p>\n\n\n\n

2. Identify companies with strong competitive advantages <\/b><\/h3>\n\n\n\n

A competitive advantage is a company\u2019s ability to stand above its rivals with desirable traits that keep customers loyal to its products or services for a long time. Some call competitive advantages \u201cwide moats,\u201d since they defend a company\u2019s market shares from competitors. <\/span><\/p>\n\n\n\n

Most people know \u201cintuitively\u201d that companies have competitive advantages, though they may not know what these advantages are called. <\/span><\/p>\n\n\n\n

Typically, competitive advantages will fall into one of these four buckets:  <\/span><\/p>\n\n\n\n