I keep encouraging my friends to invest in the stock markets. That is even at parties!
Frustrated, someone finally asked me, “Which stock should I buy as my first investment?”
I told him that my job is not to recommend individual stocks; but to help him pick the right stock worthy of him first investment.
We had an enriching discussion that day and I would like to share some of the important points from our discussion with my readers today.
So, if you are wondering how you could pick your first stock to invest in, read along..
What are we actually looking for when investing in our first company?
One of the basic principals of long term investing is about reducing risks.
A stock market investor runs the risk of any permanent erosion in the value of his capital invested.
This is something we must avoid at all costs!
The stock markets value profitability and growth in the long run. But, above all they value consistency.
So when scouting for our first investment, we should look at companies which enjoy the patronage of their customers, have displayed consistent growth and profitability in the past and are expected (with a reasonable degree of certainty) to remain profitable and continue to grow in the near future.
Look for Brands that you already use! (and are more likely to continue using.. )
To invest in your first stock, look no further than the brands that you already use in your day to the day lives.
Look for brands that already have an established market presence and brands that you trust.
Typically established brands have to spend less on marketing and sales than up and coming brands.
Also, look for brands that have a superior product or service (or the ability to effectively deliver such product or service) than its competitors!
Market acceptance and trust are key-terms here as these are the two factors that will ensure the continuation and growth of the business in the near future.
Once you have shortlisted a few of such brands, look for the companies behind such brands.
Look at the Competition!
While competition leads to lower prices and often is beneficial for the consumers, it is often the other way round for investors.
High degree of competition can squeeze the profitability of a company and constrain its growth trajectory.
We must look at companies that have moats around them which makes it is difficult for new competition to enter and take market share away from the companies.
In the financial world we often use a term known as barriers to entry. Barriers to entry are the obstacles that make it difficult for new companies to enter a particular market
Essentially, barriers to entry could be for a number of reasons like high capital cost of setting up a new business or the existence of an intellectual property right that bars other players from entry.
Barriers to entry could be for Psychological reasons as well. For example, you might be more inclined to experiment with a clothing line than you would with your brand of toothpaste.
See Profitability and Growth!
While an established brand presence goes a long way towards ensuring profitability, not all established brands are profitable.
Ideally one must look for companies that have delivered consistent profits in the past. And its not just the profitability that matters here, but the growth in revenue and profits achieved over the years.
As I have alluded to earlier, the stock markets value consistency. Inconsistent profits or the growth thereof leads to unpredictability which further leads to volatility in stock prices.
For someone making their first investment, volatile stocks are best avoided.
If you have found a company with an established brand presence, having a high degree of protection from competition and a demonstrated history of consistent growth and profitability, you are on the right path.
Now the only thing left to ask yourself is whether you believe that the company will be able to consistently grow and remain profitable in the near future?
Now, herein lies the difficult part because predicting the future is never easy.
This is where reading can help.
Try to gather as much information about the company, its business and the industry it operates in, as you possibly can. Read company annual reports, management guidance and industry journals and any other source of information that might be readily available.
The more information you have about the business of the company, the better you become at making informed predictions about the future of the company.
If you believe, based on your research, that the company can continue to grow into the future, you’ve got yourself a worthy candidate for your first investment in the stock markets!
Timing the markets!
Hey long term investor! Do not worry about timing the markets (especially so when you are new to the markets).
Just invest in the right stocks with a growth potential and if the company grows, your investments would grow over time as well!
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Hope you’ve liked our discussion on how to pick the right stock for your first investment in the stock markets.
Remember that learning and investing is an exercise that must go hand in hand.
Thanks for your time and happy investing!
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