Thought Process On Picking Your First Stock (Guest Post)
I’ve had countless queries in the past and a couple of emails recently from readers who are interested to start investing and one of the commonly asked questions is ways to pick the correct stock to invest. The first stock purchase for an investor is always intriguing.
This post was originally posted here. The writer, Brian Halim is a veteran community member and blogger on InvestingNote, with username known as 3Fs and has 2169 followers.
The emotions when you first purchase your stock are filled with mystery, excitement, fear and then there’s always the risk and reward. Many will soon get addicted to it and then will proceed with the next second and third purchase and so on.
It’s incredibly difficult to answer this short question to any investors who are asking as there’s legitimately no right or wrong answer. Nevertheless, I’ll try to provide some framework guidance which hopefully can be productive and useful to any investors who’s starting to venture out on their own.
Step 1: Organize a list of companies in your respective region that are big market cap
Your very first step as a beginner should always be looking at the bigger market cap in your respective region. This means looking at the likes of blue chip companies such as Singtel, DBS, OCBC, Sembcorp and SIA in your STI index if you are looking at the Singapore market. In the US market, you will get a list of acquainted well-known companies such as Apple, Boeing, Facebook, Starbucks, Visa and many more.
Don’t buy them yet at this point because there’s many rotten apples hidden in the fundamental of these companies, even for blue chips.
At this point, all you want to do is to get a grasp understanding of:
- What is their business model?
- What products do they sell?
- What competitive advantage do they have over their competitors?
- How much market share have they acquired?
- Management capability and their historical financial performance
Most, if not all of these information, are easily available in the annual reports or financial statement of the company where typically management would provide operational quantitative updates on how they are doing or coping with the situation.
All you really need to do at this point is just to spend some time gathering the information and writing some notes down and that’s it. No action should be taken yet at this point because the information you have is public, which means anyone else will have the same information as you do so that’s not really helping you to gain any advantage.
You may also want to segregate the list of companies that are appearing in your newsfeed or newspaper because not all the time they are good. The fact that you read in the newspapers that people are queueing up at McDonald’s does not immediately qualify them to be a good stock.
Always be selective when reading and takes information with a pinch of salt. This way, you will have more questions than answers which is good because it leads you to explore more on your questions.
Step 2: Areas of Competency
Your areas of competency is your competitive advantage over the next other person that you have a lead on.
This lead can be achieved through years of working in the industry and getting to know-how the inside operations of how certain things might work in detail. For example, if you are in procurement, you would know how aggressive your competitors are pricing in their bids for the tender or if you are working in supply chain logistics company, you would better understand the details on transit times, delivery performance, freight claims and customs requirement.
Thus, when you select companies that are in your areas of competency, you are able to value-add your experience to the companies you are prospecting and make better informed decisions from there. …