In this article we look at how you can determine which stocks to buy. After all, when buying shares, it is important to make the right decisions; in this article we will briefly look at how to buy shares, and then we will look at which stocks to select.
How can you buy stocks?
You can buy stocks with an online broker. A broker makes it possible to buy or sell stocks with just a few clicks. It is essential to make the right decision. Which broker you choose will ultimately determine how much return you get by buying shares; the transaction costs vary greatly from broker to broker.
Would you like to know at which broker you can best invest in shares? Then take a look at our overview of best brokers:
Which stocks are the best to buy?
Shares that are in line with today's trends are often the best choice. But what should you pay attention to when you want to invest in a share? We discuss a few important factors.
Low stock price
It is sensible to buy stocks relatively cheaply. Therefore, it is smart to look for bargains on the stock exchange: a bargain is a company that trades relatively low but has a lot of potential.
You can then, for example, look at the price/earnings ratio. The price/earnings ratio indicates how many times the profit is traded. Compare this figure of the company with the figures of comparable companies to determine whether it is smart to invest in the company.
By analysing the company properly, you can determine whether the company is traded below its intrinsic value. If this is the case, it can certainly be smart to buy the share.
Business model focused on the future
A low valuation alone is not enough reason to buy a share. It is also important that the company has a business model that will continue to work well in the future. If this is not the case, the profitability and therefore the intrinsic value of the company may fall in the future.
Therefore, investigate whether the company has a clear vision for the future. A company like Ahold, for example, responds cleverly to the latest developments. With the supermarket Albert Heijn they serve people in the traditional way, while with the webshop Bol.com they also sell products on the internet. Albert Heijn is a Dutch supermarket and Bol.com is a Dutch Amazon type of website.
This kind of distribution is in any case an attractive point for a stock. When a company does not put all its money on one idea, you are better protected against unexpected developments.
A role for sustainability
The climate is getting higher and higher on the agenda and this seems to apply to investors too. Therefore, investigate whether the company you want to invest in pays attention to making business processes more sustainable. In the future, governments are likely to push this more and more: companies that lag behind will be faced with higher costs. Moreover, climate-conscious investors are more likely to ignore stocks in environmentally polluting companies, which of course puts pressure on the price.
7 things to pay attention to when selecting shares
When you select a stock, you can at least pay attention to the following:
See if the company's revenues grow over a longer period of time. Growth is ultimately needed to increase the value of a share. To determine whether a growth trend continues, you can research the products and services that are offered. See how these products fit into the competitive landscape and determine whether the company is strong internationally.
Competition can kill a company: when you select a share, it is therefore crucial to look closely at the competition. Determine how the company stands out from the competition and check whether its market share is growing or falling. Don't invest in a Myspace or Nokia: these kinds of companies will eventually compete against the more innovative Facebook and Apple.
Debt / equity ratio
Debts are not necessarily bad: when a company achieves a positive result with the debts, it even contributes to the operating result. However, debts are also dangerous: if the performance is lacking, a company may even go bankrupt. Therefore, investigate whether there is a high ratio of debt to equity. In some sectors, this ratio is higher: think, for example, of construction. Compare the figure with comparable companies to see how the company performs at that level.
P/E of price-earnings ratio
With this figure, you can determine at a glance how the company is doing in relation to its profits. With the P/E value you can determine whether a company is under- or overvalued. The ratio is especially useful for comparing companies in the same sector.
The dividend policy can also be an important factor when deciding which shares to invest in. If the company periodically pays out a stable dividend, this is a good indication that the company has built up a stable position. However, beware of companies that pay very high dividends: these types of companies may not invest enough money in their growth.
When a company suddenly does not pay out a dividend, this does not have to be dramatic news: sometimes the company needs the money for a new project or to survive an economic crisis.
Effective leadership is essential for a company: a company without a good helmsman goes under. Therefore, investigate whether the current leadership manages the company in a sensible way. Don't you trust the people at the head of the company? Then it's better to select a different share.
Some shares are very volatile: they move up and down constantly, so it seems that the market cannot determine the value of a share. When you select a stock for the long term, it is better to choose a stable stock. Go for a company with nice, stable growth and a strong vision for the future. This way you can benefit from your investment in the long term!
Growth shares or stable shares?
When you decide in which shares you want to invest, you can choose between growth shares or stable shares. Growth shares are shares in companies that often still have to prove themselves. These shares are traded at a very high price: the future expected growth is already included in the share. In some cases, the company is still loss-making, but investors are still enthusiastic because of the large annual increase in turnover. In this category you will find many technology shares: think of Uber or Tesla, for example.
Stable shares are shares in companies that have already proven themselves. You will find established names such as Wal-Mart or Shell, for example. These types of companies often don't grow enormously anymore and you won't achieve a substantial return with an investment in a similar company. Instead, you can expect a stable but slow return. These types of companies often also pay out an annual dividend, which allows you to build up a small income as an investor.
When selecting shares, you have to ask yourself what you think is more important. Do you want to achieve a high return and are you prepared to take high risks? Then a growth share can be an interesting option. Would you prefer a stable capital structure? Then select a basket of stable shares.
Which shares do professionals select?
You can also see on various websites which share analysts select. They then advise you to buy or sell certain shares. Sometimes they also advise you to hold a share.
For the layman, it can certainly be interesting to see which shares select professionals. However, it is important to decide for yourself which shares are interesting for you. The professional can apply a completely different strategy: if the advisor prefers to invest in exciting companies and you are looking for a stable fund, it is better to ignore his advice.
Have shares selected
Do you have little time or no interest in the financial markets? Then it may be wise to outsource the selection of shares. The best way to do this is to invest in an ETF. An ETF is a fund that invests in a basket of shares. But in which shares does the fund actually invest? This varies widely: some funds invest in global equities while others follow an index such as the AEX.
An investment in an ETF has the advantage that your money is nicely spread over different investment categories. In addition, the management costs on an ETF are low, so that you can still achieve a good return.
A good party for buying and selling ETFs is DEGIRO. At DEGIRO you pay no transaction costs when you buy funds from the core selection. Use the button to directly open an account with DEGIRO:
Are you investing in the short or long term?
Before you can properly determine which share to buy, it is wise to determine whether you are going to invest for the short or long term. This decision is important because it will completely change your strategy.
Some people have a smaller time horizon of a few days to several weeks. When buying shares in the short term you should choose a broker with low transaction costs. It is also important to pay attention to recent news reports. Think for example of the news that a new product is being released by a technology company; this can give the price of a share a temporary boost.
In the long term, it is actually even more important to determine which share you choose. After all, you then build up a portfolio and in doing so it is very important to select the right shares. You keep the stocks in your portfolio for a longer period of time and it is therefore even more important to choose stable, profitable companies. The shares you buy must then meet these conditions.
How do you decide what share to buy?
It is important to carry out an analysis before deciding which share to buy. It is possible to conduct fundamental analysis where you look at the news and the underlying figures. It is also possible to select a share on the basis of technical analysis: you then look for certain patterns within a chart.
In the short term, technical analysis plays a more important role. In the longer term, the fundamental value of a company needs to be looked at in detail. Subsequently, it is important to determine what the value of a share is. This allows you to determine for yourself whether you think a share is undervalued or overvalued.
If a share is undervalued, buy it and hold on to it. However, a share can also be overvalued; if this is the case, you can still make a profit. It is in fact possible to open a short position, in which case you benefit from a falling price. If you cannot determine whether there is undervaluation or overvaluation, it is better to leave the share alone.
A few more important tips
It is important to get down to practical work. Many people get stuck endlessly reading annual reports or news items, but that way you don't develop a feeling for them. Many brokers offer the opportunity to try investing in stocks by means of a demo. With a demo, you can try out the possibilities and discover which stocks work best, click here to open a demo >>
In addition, of course, knowledge is power. Before deciding which shares to buy, it is important to have a clear picture of the company's weaknesses and strengths. Analyse the company's data and make a selection of the shares you would like to invest in. Then, you can make a final choice and start buying shares.
The perfect share
Ultimately, it is important to remember that the perfect share does not exist. However, it is still possible to invest profitably in shares by deciding which shares to buy. Here it is important to study and learn a lot so that you understand the underlying mechanisms.
So, don't expect to get rich any time soon; no, use your common sense and don't follow the crowd like a sheep. Find your own path to success and spread your risks over several shares. Keep in mind that it is also possible to invest in other securities such as bonds and Forex; by spreading more, your chances of making good investment decisions eventually increase!