First Steps in Stock Investing

If you’re willing to roll up your sleeves and do the research
necessary to invest in individual companies, a stock may be
a good fit for your new portfolio. The key is to avoid excessive
risk. The best way to minimize risk is to buy a solid
company — one that is essentially a blue chip or a largercompany
growth stock.

Look for a stock with consistent performance
that appears to sustain and even increase over time.
The Dow Jones Industrial Average is the index of blue chips,
listing the likes of IBM, Kodak, McDonald’s, and Sears.
These stocks tend to hedge investors’ first exposure to equity investing by paying
dividends that offset any lackluster performance.

You may also want to seek out a value stock — a stock that
has been underperforming its peers, but that seems poised to
turn things around. An index called “Dogs of the Dow,”
which is compiled by Dow Jones and printed in The Wall
Street Journal, lists specifically those stocks that are on the
outs. Of course, none is guaranteed to become the next best
stock to own. You have to judge for yourself by looking at a
company’s long-term growth and earnings; its price-to-earnings
(P/E) ratio; and any company news that can give you
insight into debt level, acquisitions on the horizon, and competitive
edge of products, services, and management. (The
P/E ratio is derived by dividing a stock’s share price by its
earnings-per-share price. The result shows how much
investors are willing to pay for each $1 of earnings.

Annual reports, which you can request from a company’s own
investor relations department, can give you some of these
details;
These services can show you a stock’s ups and downs over the years
and even over the past month. Analysts’ reports can project
a company’s earnings, dividends, and price growth over the
next few months and years.

Don’t forget to check on competitors, too. Because all performance
data is relative, a company that may seem like a
great catch may actually be inferior to its peers, but you won’t
know that if you don’t check. For example, if you’re thinking
about investing in McDonald’s, make sure that you check
out the stocks for Wendy’s, too