Some of the most frequent questions we get are around understanding what to look for when buying stock. Unless you study the market and individual stocks, it can seem overwhelming. But just like laying the foundation when you build a home, knowing what to look for is the first step in building a portfolio that you can feel confident about.
Before choosing stocks, it’s important to recognize your investing temperament and the amount of risk you’re willing to take with your investments. Realizing this will help focus your investment decisions on what is best for your investing career.
What to look for when buying stock as a conservative investor
Conservative investors take a safer approach to the stock market than those who are not as risk-averse. Conservative investors are primarily interested in long-term investment situations to achieve steady returns with the lowest levels of risk possible.
These investors often target broad diversification, which usually equates to lower risk. This level of diversification includes both the individual stocks they invest in, as well as the overall balance of their entire portfolio. Their portfolio holdings usually include blue chip investments with a strong history of profits, dividend-paying investments, and traditional ETFs. These investors also target undervalued stocks and spin-off stocks when possible.
Among their conservative investing strategies is the use of dividend reinvestment, which is the process of using dividend distributions to buy more shares of stock. Over time, reinvesting like this can lead to greater returns.
Overall, conservative, risk-averse investors should target reputable companies with a history of profits and dividend payments. It’s even better if the dividends have increased over the years. Also, target companies with low amounts of debt with strong management and a large market share.
What to look for when buying stock as an aggressive growth investor
Aggressive investors are accustomed to higher risk and the potential for greater returns. They may also be more inclined to participate in short selling with very little interest in holding investments for long periods.
Many aggressive investors target growth stocks, which are expected to grow quicker than the market average. Growth stocks are often more volatile and come with greater risk than, say, blue chip stocks. Aggressive investors also tend to target penny stocks, small-cap stocks, and up-and-coming stocks in mining or technology.
The level of diversification may be different for aggressive investors as well. They may focus on one specific industry, sector, or geographical location, leading to significantly less diversification and a higher amount of risk than a portfolio that is more evenly dispersed between sectors.
Additionally, aggressive investors target equities and commodities they believe will appreciate relatively quickly. This may involve targeting investments that are shooting up in value only to actively sell after they realize some profit. Aggressive investors frequently target micro-cap stocks, options trading, private equity investments, aggressive growth funds, and international stocks.
What to look for when buying stock when your temperament falls somewhere between aggressive and conservative
Conservative investors don’t need to stick exclusively with conservative investments. Many will dedicate some small percentage of their portfolio to aggressive stocks. On the other hand, aggressive investors can also target some investments for long-term gains. It doesn’t have to be one or the other with investing strategies. There can be multiple approaches within a diversified portfolio. Just be sure to have the majority of your investments in line with your investing temperament.
What are the most important criteria you look for while investing in stocks?