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Choosing the Right Company Stocks: A Quick Guide to Investment Opportunities

You have heard a lot about investing in the stock market and have finally decided to give it a try. Where do you start? Which stocks should you invest in as a beginner?

A little bit of theory. Let's understand what stocks are. In various sources, you will find gigabytes of information on financial literacy. To digest all of this, it is necessary to at least understand the basic terms.

A stock is a security that gives its owner something like a small piece of a huge pie. If we imagine that a company was divided into small parts and distributed, or rather sold, to people, then one such piece is what we call a stock.

Let's say you bought stocks of a company, for example, for a dollar. After the company achieves some success, such as securing a contract, increasing its turnover, or opening new branches, and its value increases, the stocks also increase in price. Now you can sell them for $1.50. But this is, of course, a very simplified example.

Before any investor, which is what you will be called if you buy securities of a company, there is a question of how to choose companies and stocks to invest their money in. Moreover, it would be good to earn money rather than lose it.

Why is it better to buy stocks through a broker? Who is a broker, and how will they help you buy stocks?

The answer to this question is very simple - without a broker, you simply cannot access the stock market. Therefore, buying stocks through a broker is not "better," but rather "necessary."

The rules dictate that only specialized companies with special licenses can participate in trading. Brokers are companies that can provide their clients with access to trading. To become their client, you need to open an account with a broker. Nowadays, when almost everything can be done from a mobile phone, opening an account can be done in a matter of minutes. All you need to do is follow the instructions on the broker's website.

Opening an account is quick – the broker will process your application within a couple of hours, and then you will need to register on the stock exchange. The registration on the exchange can happen on the same day or the next day if you submit your application closer to the evening.

How to choose a broker? What should you pay attention to in order to make the right choice?

Pay attention to how long the broker has been operating in the market, what licenses they hold, and their reputation. To provide comprehensive services, a broker needs licenses for brokerage and depository activities.

Just like in any business, customers vote with their feet and their money. If you are not satisfied with the service, you can switch to another broker. Therefore, a large number of active clients, positive reviews, and high trading volumes are good indicators.

Traders often open accounts with multiple brokers simultaneously and compare their experiences to see which one is more comfortable for them. To assess the quality of a broker's services, test them out and answer these questions: Is it easy to reach their consultants and technical support? How convenient is it to deposit funds and withdraw money? Is the trading terminal and personal account user-friendly? Is the customer support friendly? Does all the software work properly?

Pay attention to whether the broker provides analytical support to clients: do they prepare market analysis reports, trading ideas, and offer ready-made investment products? Such solutions are very convenient for those who are just starting their investment journey. For example, model portfolios that already contain stocks or bonds with good growth potential.

How to choose which stocks to invest in? Where should you start when diving into investing?

The simplest way is to start with large, well-known companies that are already popular among investors. They are often referred to as "blue-chip" companies. Typically, these are stable companies. What are their advantages? Their stocks are always in demand, which means you can easily buy them and will always find a buyer if you decide to sell.

When you buy a stock, you acquire a share in a business and become a shareholder. Assessing the prospects of a particular company involves not only a quantitative evaluation of its fair value but increasingly a qualitative assessment of its business prospects.

Investment Horizon and Return on Investment

An investor expects to earn returns on their invested capital. When choosing stocks for an investment portfolio, it's important to understand what makes a particular stock attractive. For some stocks, dividends can be a source of returns. These stocks are often referred to as "value stocks," and they are typically mature companies in established market segments or industries that prefer to return profits to shareholders through dividends or share buybacks rather than invest in further growth (as the internal rate of return on new projects is often lower than the cost of capital). These stocks tend to be more stable, especially if they are in non-cyclical sectors.

For other companies, the investment attractiveness lies in successful business growth, investments in research and development (R&D), and the creation of new products or markets. These are "growth stocks," shares in "unicorn companies" from the technology sector that bet on innovation and change. Since these stocks incorporate high expectations of future growth in key financial indicators, they are often valued higher by the market than stocks of mature companies. Many of them may even be overpriced at the current moment, but investors are willing to pay a premium and overpay now in hopes of participating in a promising business.
Dividend Strategy

This is one of the simplest strategies for investing in stocks. If you want to build a dividend portfolio, you can rely on a company's dividend payment history, which is often available in a broker's mobile application. A good dividend stock has a positive history of dividend payments – they increase or at least remain stable from year to year, and the dividend yield (the annual dividend divided by the stock price) is sufficiently high.

There are some peculiarities here. Typically, companies in sectors oriented toward domestic demand (telecommunications, utilities, retail, or real estate) have relatively stable dividend sizes (without sharp fluctuations from year to year), but their yield may be lower compared to companies in cyclical sectors (strongly linked to economic cycles), such as the oil and gas industry or metallurgy. However, during certain periods of positive market conditions, they may offer dividend yields above 10%.

Even if a company has a positive history of dividend payments and a high current dividend yield, it is necessary to assess its ability to sustain these payments in the future.

Broker analytics can be helpful in this regard – their reports often include projected dividends for the next 1-2 years.

For investors converting savings into investments, dividend yield is the most understandable alternative to deposit rates or bond coupon yields.

Analysis of Stocks with High Growth Potential

Buying stocks with high growth potential is a more complex strategy, requiring a more extensive analysis. First and foremost, it is important to understand the business's prospects and its sources of growth, as well as attempt to predict what qualitative changes may occur. Secondly, it is necessary to evaluate what positive factors and parts of future growth are already incorporated into the stock price. Unlike the dividend strategy, the investment horizon here is a minimum of 3 years, ideally 5-10 years.

A good company is not always a good stock because promising businesses may already have a high valuation, and it is easy to overpay. Conducting such an analysis independently can be quite difficult and time-consuming. Therefore, broker research reports are a good source of information. The key points to consider are the recommended action on the stock (buy, hold, or sell) and the target price for a 12-month horizon.

Analysis of Quantitative Indicators

If you want to analyze an investment opportunity on your own, start by determining how economic trends affect the business and how the business will grow in the future. Company presentations and management forecasts available on the company's investor relations website can be helpful in this regard.

In financial statements, pay attention to the levels of operating and net profitability and the debt burden. Companies with low profitability, significant debt obligations, and weak cash flows have an increased credit risk.

Next, evaluate the multiples. Simplistically, you can look at a stock in terms of the return on investment. For this, calculate the P/E ratio (price/earnings), which reflects how many years of current earnings we are paying for a share in the company. For global stocks, this ratio often exceeds 18x on average.

However, multiples do not always reflect the business prospects accurately. For example, for fast-growing IT businesses, it is common for them to be unprofitable or have minimal profits at high (>20%+) revenue growth rates. These companies typically reinvest all funds into development and do not pay dividends but still receive high valuations because investors are willing to pay for the opportunity to participate in a promising business with the expectation that the company will become one of the industry leaders in the future, generate profits, and start returning funds to shareholders.

Main Qualitative Criteria

Here, the approach relies more on qualitative indicators rather than quantitative ones – understanding the business and its prospects, brand strength, technological advancements, belief in the management team's ability to execute its plans and create shareholder value. Investing in growth stocks is an investment not in the present (dividend stream) but in the future, based on a new economic order and breakthrough technologies.

The world has entered the fourth industrial revolution, based on quantum computing, big data, renewable energy, augmented reality, artificial intelligence, robotics, blockchain, and the Internet of Things. However, understanding an attractive market niche does not always help in selecting a stock that can show significant growth in value over the next 5-10 years. Listed securities may incorporate high investor expectations and be overvalued. History shows that out of 10 successful companies, only 1-2 will achieve success in their endeavors, while the rest will be acquired or go bankrupt.
How to Avoid Risks When Investing Money in Stocks?

How not to lose everything?

It is not possible to completely avoid all risks. It is important to understand this. If someone offers you the opportunity to invest in securities without risk, then they are either a fraud or a middleman who has taken on those risks.

However, risks can be minimized. For example, by investing in stocks of large companies. In the event of a market crash, shares of large companies can always be sold. Most shareholders are likely to do the same, causing the price to drop sharply and resulting in selling at a loss. But at least you will be able to recover part of your investment.

"Blue-chip" stocks are almost always companies with government participation or systemically important companies, meaning those that support an entire industry or even a city. Even if these companies face significant challenges in their business, they will receive federal support.

An important piece of advice, not obvious to beginners, is to not invest all your money in one company or one sector of the economy. Divide your investments into several parts and allocate them differently. In other words, diversify your risks. If there is a crisis in a particular sector of the economy, and stock prices plummet, you will only lose a portion of your investments, while the rest can be preserved.

This idea is well reflected in the principle of the founder of one of the world's largest hedge funds, Bridgewater Associates, Ray Dalio:

Having several quality income streams that are not related to each other is better than having just one. And knowing how to combine income streams is even more important than knowing how to choose good income streams.

In other words, it is important not only to choose and diversify income streams correctly but also to combine them in a way that reduces risk and increases the chances of the "survival" of your investment portfolio in any market conditions over the longest possible horizon. This is often achieved by including not only stocks but also bonds, precious metals, exchange-traded funds, and other alternative investments in the portfolio. The returns of this "all-weather" portfolio will be more stable, and the risk of capital loss will be reduced.

Furthermore, do not invest in debt and do not invest all you have – such investor behavior is more akin to gambling, often with the same outcome. Investing in stocks is a profession that requires experience, knowledge, time, and investment. If you are venturing into this field as a hobby, keep in mind that there is a price to pay for the risk.

However, lacking experience does not necessarily mean that you will inevitably lose money. We have provided advice to help you take your first steps. Start small, read and learn, and in the beginning, arm yourself with experience and the guidance of a mentor.