Picking stocks can feel intimidating. There are 11 stock market sectors, 69 distinct industries and thousands of publicly traded companies across the major U.S. exchanges. For a beginner, it can be hard to know how to choose stocks that are positioned to perform well.
The first thing to understand is that no foolproof algorithm or formula guarantees success. With so many stocks available, there are even more investing philosophies, strategies and mindsets that people use to approach the market.
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For newer investors, and even experienced investors rethinking their approach, it helps to focus on a few key principles. Five important things to know before picking stocks are:
1. Recognize that nothing in the stock market is guaranteed.
2. Know you are betting on yourself.
3. Know your goals, time frame and risk tolerance.
4. Research thoroughly.
5. Keep your emotions in check.
1. Recognize That Nothing in the Stock Market Is Guaranteed.
A core reality of investing is that nothing is guaranteed. No one can know with certainty how a stock will perform, which is why stock picking requires caution and an awareness that the market can deliver surprises.
One way to prepare for surprises is diversification. Owning stocks across multiple sectors can add stability because when one sector struggles, another may perform better.
A diversified stock portfolio often includes at least five to 10 different positions, and no single holding should make up more than 10% to 20% of the overall portfolio. Still, diversification does not guarantee profit or prevent losses. Even though the stock market has historically risen over long periods, investors should expect volatility along the way and avoid investing money they cannot afford to lose.
2. Know You Are Betting on Yourself.
Picking individual stocks means betting that you can outperform the overall market. That is extremely difficult. Over long stretches of time, most professional large-cap fund managers fail to beat the S&P 500, even though outperforming the market is their full-time job.
Individual investors face even bigger challenges, partly because they cannot dedicate the same time and resources to investing. They also tend to make costly psychological mistakes, such as buying after a stock has already surged, selling when prices fall and trading too frequently.
Choosing individual stocks instead of a low-cost index fund, such as the Vanguard S&P 500 ETF (ticker: VOO), means choosing a harder path with worse odds, and it requires confidence that your process can deliver better results than simply earning the market return.
3. Know Your Goals, Time Frame and Risk Tolerance.
If you still want to pick your own stocks, the next step is defining your goals, your time horizon and how many up-and-down movements you can handle.
Someone who is young, highly aggressive and aiming to build wealth quickly may focus on higher-risk and higher-reward choices such as growth stocks or beaten-down contrarian opportunities. Someone with a shorter time frame or a more conservative approach may lean toward blue-chip companies and dividend-paying stocks, especially if earning income is part of the goal.
Short-term momentum trading and chart-based strategies fall outside the scope of this discussion, but the general point still stands. Even a rough sense of your goals helps narrow the list to stocks that make sense for your situation.
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4. Research Thoroughly.
Once you know what you are looking for, the real work begins. The same logic that applies to buying a product or service applies to investing. You should understand what you are buying and what you expect to gain from it.
Strong due diligence plays a major role in stock selection. Many professional investors review company financial reports and consider analyst opinions before making decisions, but it is also important to evaluate the company’s financials yourself.
Investors generally rely on two main research approaches: fundamental analysis and technical analysis. Fundamental analysis is typically used for longer-term investing decisions, while technical analysis is more often used for shorter-term trading decisions.
Fundamental Analysis
Fundamental analysis evaluates the quality and value of a stock based on the company behind it. Investors may use annual reports, quarterly conference calls and third-party databases to study factors like earnings growth, profitability and revenue growth. They may also compare a company’s financial metrics to similar companies in the same industry to estimate what a reasonable share price might be. Some investors also use brokerage research reports to gather professional perspectives, but those reports work best as a supplement to your own analysis. If the fundamentals suggest that the company’s intrinsic value is well above the current share price, an investor may choose to continue holding the stock.
Some common fundamental indicators to pay attention to include:
— Price-to-earnings (P/E) ratio. This is the stock’s current price divided by the company’s earnings per share, or EPS. It tells you how much you are paying for each dollar of earnings. Lower is typically better, but industries differ in what is typical.
— Price-to-sales (P/S) ratio. If a company doesn’t have enough earnings history to make the P/E ratio meaningful, P/S is a good alternative. This measures a company’s price relative to its revenue. It can also be a better metric when comparing companies in industries with revenue as a key driver, such as tech startups or high-growth stocks. A high P/S can be a sign a stock is overvalued.
— Price-to-book (P/B) ratio. Another alternative or supplement for the previous ratios is the P/B ratio. It shows the price investors are willing to pay per dollar of company assets, and it can be useful in evaluating companies with substantial tangible assets like real estate firms or banks. Lower is better if you’re looking for value.
— Price/earnings-to-growth (PEG) ratio. The PEG ratio adjusts P/E to account for a company’s expected earnings growth. As a result, some would say PEG paints a more accurate picture than P/E. PEG is calculated as the P/E ratio divided by the expected annual EPS growth. PEG ratios higher than 1 are generally considered expensive, so many investors look for PEGs of 1 or less.
Technical Analysis
Technical analysis focuses on price behavior rather than company performance. It uses historical trading data such as price movements and volume to look for trends or patterns that might suggest future direction. This approach appeals to people who prefer chart-based decision-making and believe that market prices reflect the combined judgment of many investors.
5. Keep Your Emotions in Check.
Long-term investing success also depends on emotional control. The economy and market move in cycles, and downturns are unavoidable. A decline does not automatically mean you need to abandon your investments or your retirement plans.
Over time, the S&P 500 has repeatedly recovered from major downturns and eventually reached new highs. Rather than panicking during a market drop, disciplined investors often review their holdings, consider rebalancing and sometimes add to positions if their long-term outlook has not changed.
A useful question to ask during a sell-off is whether the long-term prospects of the businesses you own have truly changed, or whether the decline is mainly driven by a temporary economic slowdown that may eventually pass. Investors who can resist selling in the worst moments, and avoid chasing prices in the best moments, tend to give themselves better odds of long-term success.
Consider Professional Oversight as You Learn
Many DIYers are willing to take the plunge into learning a new skill on their own. But investment mistakes can be expensive and may trigger undesirable tax surprises.
Professional advisors can be a great source of support. While most advisors are compensated by a percentage of the assets they manage, others are willing to be paid on an hourly basis. You can craft your strategies and get their professional insight before continuing on your own. In doing so, they may make suggestions of other investments that could be a better fit than what you have already found. Additionally, they can invest alongside you using more advanced strategies, such as options or alternative investments, that can enhance your planning while you come up to speed.
Finally, if you ultimately decide that investing on your own is outside your bailiwick, you will already have a professional you trust who knows your goals and risk tolerance and can step in right away.
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How to Pick Stocks: 5 Things All Beginner Investors Should Know originally appeared on usnews.com
Update 01/22/26: This story was published at an earlier date and has been updated with new information.
