I got a lot of people that were interested in my previous post on investing, so I thought I would give bit more information on picking out good stock and mutual funds in a few easy steps.
First stocks –
Pick a stock of a company you are familiar with and a company you like – unless you are experienced and have a lot of time to research and study, stick to companies you know. Then go to any site – the site where you buy your stocks should have all this information and look up your stock
Look at the P/E ratio (price to earnings).. Each sector has a different p/e ratio that will tell you if the stock is a good buy. Look at what the P/E ratio is on your stock, and compare that to the industry average P/E ratio (hopefully the site you have chosen will show you this.. thestreet.com has it under “Earnings” when you search for your stock).. If your companies P/E ratio is lower than the sector average, then it is “usually” a good buy – it means that the price of the stock compared to its earnings is cheaper than competitive companies… if it is much higher than the rest, then the stock may be overvalued.
Then look at the dividend – might as well choose a company with a high dividend. Anything over 2% is pretty good and they can go as high as 6%+
If you are wanting to buy more than one stock – diversify yourself and buy over many different sectors. For example, don’t buy both Target and Walmart – you are just repeating the same sector.
Mutual Funds
The company you choose should have several options for a No-Load, No-transaction fee mutual funds. In other words, you do not want to pay anything to buy this fund. If you have $500 to put into this fund, you want ALL $500 to go into that fund and NO fees to buy it!
Speaking of fees, look at the Expense ratio (what it costs a year to own the fund) – ideally, you want something that is much less than 1%, and definitely not higher than that. I have recently started with ETF’s (exchange traded funds) because Fidelity has started to offer them (finally) with no fee to buy and that have extremely low expense ratio – like .09% – really low! If your company offers them at no cost – they are a low expense alternative. But if they are not offered, just pick a fund with a reasonable and low expense ratio.
Next, look at the Morning Star rating. Ones with a 4 -5 star rating are ideal.
Look at its lifetime performance. You want a fund that has been around for awhile and over it’s lifetime has done well. 3-5 year performance doesn’t tell you as much as lifetime. You should be able to compare its performance to an industry average in the same sector (Fidelity does this for me on my research pages)
Of course then we would need to go into balancing your portfolio, but that is a whole other post… Sites like Fidelity, will actually tell you how to do that once you get more and more funds/stocks.
If you have to choose between individual stocks and mutual funds – mutual funds are easier and overall safer (especially if you do not have the time to research EACH stock!!) because you are paying someone to pick the stocks for you, that will hopefully make you money 🙂 but stocks are fun too – just a bit riskier (that is why you go for good reliable companies and not chase stocks – unless you have a lot of $$ to waste, which I don’t :P) Just buy and hold and have the dividend reinvest and keep growing… I would just put most of your money into mutual funds/ETF’s and a smaller percentage into stocks that you like (sharebuilder works GREAT for slowly building stock shares at only a little $$ a month!)
Remember to just be mindful of all the fees and go with companies that are upfront about all their fees. Little fees can really add up over time!!
