The stock market intimidates all kinds of investors, from seasoned traders to folks just beginning to dip their toes in the waters of Wall Street. The intimidation factor is valid: the market does what it will, and there’s no stopping it. But with the right approach, a little wisdom, and careful data organization, even beginners can see real success picking and trading stocks. 

In this Beginner’s Guide to Picking Stocks, our team provides a helpful framework for entering the market confidently and taking all the right steps to become a savvy, successful trader.  

Define Your Investing Goals 

Before you jump into choosing companies and stocks to buy, you have to determine your investing goals. But understand that these goals are unique to you and your situation. 

When you enter the trading world, you might feel pressured to perform at a certain level, strive to mirror top traders, or follow the path of investors you admire. While setting lofty goals can be a great way to push yourself, remember that your trading journey is yours alone. 

If you’re a younger investor, you might have a long-game mindset, looking to increase your portfolio slowly over time. If you’re older, perhaps you’re investing with capital preservation as the goal so you can live off your holdings. Or maybe you’re most interested in generating regular income from dividends and distributions. 

What do you want to achieve with your investments? Are those goals realistic? The first step in choosing stocks as a beginner is defining your goals. Every other decision flows from there. 

Determine if a Company has a Competitive Advantage 

When you narrow down the list of companies you’re interested in investing in, you’ll need to look for differentiating factors. Specifically, you want to choose stocks from companies with a sustainable competitive advantage, also called a moat. 

Various factors influence a moat, including 

  • Scale 
  • Switching costs 
  • Unique brands 
  • Intellectual property and more 

What factors or qualities will enable a company to outperform and outlast its competitors? Asking these questions will help you narrow down organizations that are lucrative and support your investment strategy. 

Determine a Fair Price 

As you pick stocks, you must determine if the current price is a good value. That might be challenging for a beginner with little to no investing experience. Below are a few ways to evaluate a stock’s price and whether or not buying a particular stock is wise.  

  • Price-to-Earnings Ratio: A P/E Ratio defines a company’s value based on the ratio of its share price to its earnings per share. Stock trading is at an ideal price when the P/E Ratio dips below its historical average. 
  • Price-to-Sales Ratio: This metric compares a company’s stock price to revenue. It’s useful for growth stocks that produce unstable earnings or aren’t especially profitable. A P/S Ratio can help beginner traders identify undervalued stocks that might make good investments. 
  • Dividend Yield:  Dividend yield expresses a dividend as a percentage of its stock price, found by dividing annual dividends by the current share price. If the DY is above average for a stock, it’s likely trading at a good price. 

Remember, stock prices are determined by performance expectations. Historical data serves as a guide but can’t determine a stock’s future value. 

How Much Are You Willing to Risk? 

Every investor must determine their risk tolerance. The stock market is, by nature, uncertain, and there’s risk involved with every trade. Determining your comfort level with risk allows you to create a trading plan that aligns with your goals. 

Here are a few questions to ask yourself to understand your risk tolerance better: 

  • What’s my comfort with market ups and downs? 

Are you willing to take great risks for potentially great returns? Or do you prefer to play it safe? 

  • What’s my timeline? 

Are you a younger investor with decades of investing in your future? Or do you have a shorter timeline that requires a more conservative approach? 

  • What’s my financial cushion? 

Do you have the cash or other investments to fall on if a risky decision results in loss? 

  • What investments align with my risk tolerance? 

You have low-, medium-, and high-risk investment options that allow you to trade according to your comfort with risk. 

Keep a Safe Margin 

The final step of picking stock is to purchase below your estimate for a fair price. Conservative buying like this operates within what’s called a margin of safety. If your valuation of a stock or company is off, you can prevent significant loss by buying below your estimated fair price. 

Some stocks might boast stable earnings and a promising future. In those cases, you can manage with a narrower margin of safety. But give yourself a wide margin for growth stocks with less certain earnings. Buying at 15 to 30 percent below your valuation ensures that if things go awry, you’re not on the hook for significant losses because you bought your shares at relative value.   

Analyze Trading Data to Evaluate Performance and Make Smart Decisions 

Successful traders pick stocks strategically. As we’ve explored, many factors influence a lucrative stock pick. The best way to evaluate your performance as a beginning trader or a seasoned investing strategist is to assess the data. 

TradeSage is a trading journal built for investors at every skill level and stage of expertise. We help you track picks and trades and keep tabs on the metrics that matter most to you. Our easy-to-use interface allows you to seamlessly import your trades. TradeSage then automatically gathers vital trading metrics, calculations, and data so you can trade like a wizard. 
Create your TradeSage account today to make data-driven stock picks –– even as a beginner.