Investors prefer owning shares of a company's stock as their choice of investment, edging out other asset classes, according to the 2011 Global Investor Sentiment Survey conducted by ORC International for Franklin Templeton Investments. With the right research and a bit of equity, you can get in the game with a portfolio that can fine tune your investments and deliver your specific financial goals. However, it's important to know that compiling a diverse and well-balanced portfolio of several stocks can be expensive.
Pick the Best Performers
Pick five to seven companies to begin your research. Industry experts recommend selecting a basket of stocks representing major industries. Make sure you scout stocks in a variety of sectors, such as finance, retail, durable goods, utilities and technology. Your objective is to identify a group of 15 to 20 diverse stocks.
Learn about the trends, challenges and any shifts in the market that affect each company's performance. Finding strong companies with solid earnings and attractive balance sheets takes some digging through the hype. You should have a firm grasp on how the company makes money, its competitors, and its market share. This way you can better understand business mechanics.
Calculate the approximate return of the stock picks. The best performers will net you an annual rate above 10 percent. Find the company's reported estimated earnings growth rate and add it to the dividend yield. Both of these numbers are listed in the company's financial reports. For example, assume a company has an earnings rate of 9 percent, and a dividend yield of 3 percent. The potential annual earnings equals 12 percent (9 + 3 = 12). Perform this calculation for each company you research, and look for the ones with the highest percentage.
Compare the company's price-to-earnings ratio (P/E) with its industry competitors. To find the P/E ratio, divide the stock price by its earnings-per-share (EPS). Use the reported EPS listed in the company's financial filings. Growth stocks generally have high P/Es and value investors trend toward companies with lower P/Es. It's good to have a mix of growth stocks, and value stocks. However, it's important to keep in mind that growth stocks tend to come with a lot more risk than value stocks.
- Although legal claims are often routine business, court battles that damage market share, branding or reputation can diminish a company's profitability. Learn whether the company has legal issues or patent issues.
- A portfolio dominated by one industry or sector is vulnerable to direct, crippling hits that can snatch profits and value in a domino effect. If 65 percent of your stocks comprise companies in one sector, bad publicity or bad results for one company can infect your holdings in that sector. Protect yourself by diversifying.
Items you will need
- Company financial statements
- "Stock Investing for Dummies, 3rd Edition"; Paul Mladjenovic; 2009
- Securities and Exchange Commission; Beginner's Guide to Asset Allocation...; August 2009
- Creatas Images/Creatas/Getty Images