What Kind of Stock Should I Buy?

People use a variety of investment approaches and philosophies when selecting which stocks to invest in. An investment strategy is a set of guiding principles that help you decide what to buy and when. Here are a few tips and tricks from the pros when deciding which stock to buy:

Buy what you know

If you like a company’s products and services or what it stands for, why not get in on the action?  It’s a good idea to do your homework on a company to decide whether it’s worth putting your hard earned cash into it.  Being a customer and knowing the company’s products can give you a leg up.

investment approaches, stockpileBuy stocks you think are undervalued

Maybe your favorite gaming company is coming out with a game you think is going to be a blockbuster.  Or perhaps a share you have been keeping an eye on tumbles 10% due to some bad news, but you think the market overreacted.

Diversify!

Diversification is a vast subject that we’ll be covering more, but for now, we’ll say this: when you buy a mix of stocks, you have a better chance of making a profit while managing your risk.

Invest in an ETF or mutual fund

If you can’t beat them, join them, right?  It’s not easy to hit the market’s average rate of return (which is historically pretty great: 9.8%), so a good strategy is to invest in funds that track the market.   A fund is a collection of stocks. An S&P 500 index fund has all 500 stocks that make up the S&P 500 index.  So if you buy that fund, you’ll own a piece of all 500 stocks in one fell swoop.  Other index funds track foreign stocks (say, Japanese stocks). Additional funds follow the price of a commodity, like gold or cocoa.  Still, others track bonds.  Funds come in two primary forms — exchange-traded funds (ETFs) and mutual funds. A famous investor, John Bogle of Vanguard, is a significant index ETF fan.

Some Important Questions To Consider:

What does the company do?

How impressed are you with its products and services?

How is the company doing in the marketplace?

Do you think its best days are still ahead or does it feel overrated?

What’s the outlook for the industry?

Who leads the company?

How are they doing against the competition?

Is the business profitable?

Are earnings steady or volatile?

Was a significant drop (or jump) in the company’s stock price an overreaction?

How much debt does the company carry?

What are the risks to the business?

Do you have any insights into the company that other investors might not have?

Any red flags?

Stock Buying Advice from the Pros – Investment Approaches

Buy what you know. – Peter Lynch

Buy wonderful businesses at a fair price with the intention of holding them forever.  – Warren Buffett

Don’t put all your eggs in one basket. – Cervantes\

Many successful investors recommend investing in companies you know: What products or services do you use and love? Where do you shop or play?

Start by learning about the company, one of the best investment approaches. You can find lots of information on the company’s website and in news articles. More detailed financial information is available on the Stockpile website or mobile app, on sites like Google Finance, or in the Investor Relations section of the company’s website.

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/meghan Gardler