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Tesla, Apple, Amazon … you know the companies, and you’ve probably heard them mentioned in stock market news a time or two. But how do you know if these stocks (or any stocks for that matter) are right for your portfolio? If you aren’t sure how to pick stocks, where do you even begin?

You have far more choices in the stock market than just the companies that dominate the headlines — but finding stocks, mutual funds, and other investments that are right for building your portfolio doesn’t have to be as intimidating as it seems.

With a little research, practice, and fine-tuning, you can form an investment strategy that can help you get closer to your financial goals.  And whether you’re a new investor who’s still learning the ropes, or you’re shifting from a managed investing to DIY strategy, these tips can help.

 Start with your risk tolerance.

One of the most important things to know is what kind of risk you’re comfortable taking on. Stocks (and the stock market as a whole) are unpredictable. While picking the right stocks could increase your chances of seeing some great returns on your money, there’s also the possibility of losing money.

When navigating stock picks, you’ll want to keep diversification in sight as well. Diversification means putting your money into different investments to spread out risk. For example, your portfolio might include one or more individual stock picks, as well as a mutual fund or two, some bonds, and maybe cash as well. If you want to diversify further, you may look at investing in different industries or even securities from issuers in other countries.

Diversification can make it easier to get through periods of volatility, because investments in different asset classes across multiple industries can react differently to market changes. When stocks are down, for example, income from bonds can help balance that out and vice versa.

By understanding your personal risk tolerance, you can better pick out a mix of securities that will reflect your comfort level in the market.

Set your investment goals.

When investing your money in stocks or the market in general, it’s important to think about what you hope to achieve. Are you investing money long-term to help build wealth for retirement? Or maybe you’re only interested in getting your feet wet as you learn how the market works?

Your goals can help you come up with a plan for investing. And when you have a plan in place, it’s important to keep those goals in mind and avoid making emotion-based decisions about when to buy or sell.

Pro Tip: Here’s a simple investing rule to remember when volatility has you feeling on edge: It’s time in the market, not market timing, that counts.

What that means is the more you invest over longer periods of time, the better your odds of building and growing wealth — versus jumping in and out and trying to find hot stock picks. So, if you’re wondering whether now is a good time to start investing in stocks, experts will almost always agree that there’s no time like the present.

Choose a strategy for picking stocks.

First, there’s value investing. Value investors look for stocks that are overlooked to invest in. This means that the overall market underestimates the stock’s intrinsic (or foundational) value — potentially making it a bargain buy when investing for the long-term.

Undervalued stocks can be dark horses for growing a portfolio, if those stocks significantly increase in value later. Value stocks can also offer another benefit if they pay out dividends. Dividends represent a portion of the company’s profits. Investing in dividend stocks can add a nice little income stream to your portfolio.

Growth investing, on the other hand, is different. With this strategy, the focus is on stocks that are anticipated to grow and potentially deliver bigger investment returns over time. Growth stocks typically don’t pay a dividend, since most of the profits get reinvested into growing the company.

When you think about how to pick stocks to build your portfolio, you’ll want to consider whether you lean more toward value investing, growth investing, or somewhere in the middle.

Get familiar with stock analysis.

Stock analysts and gurus are one place you can look to for advice when shaping an investment or stock trading strategy. But if you’ve got the time and the patience, you can learn the basics of stock analysis yourself.

You can use two main approaches: fundamental analysis and technical analysis. Both can help with evaluating stocks, but they each look at different aspects of securities.

For fundamental analysis, the focus is — you guessed it — a company’s fundamentals. That includes factors like:

  • Revenues
  • Earnings
  • Profit and profit margin
  • Price to earnings ratio
  • Existing debt
  • Future growth projections

To study a stock’s fundamentals, you’ll want to look at the company’s annual report (which can give you more context about its industry), and financial documents like the balance sheet, income statement, and cash flow statements. You may also want to research factors like a company’s business model, management, and corporate governance. That’s because analyzing both qualitative and quantitative data can give you a more complete picture of a company and what it’s worth, as well as how competitive it is in its industry and its future growth potential.

Altogether, the idea is that by studying the fundamentals, you can find companies that are financially sound. And that can help with making stock picks if you’re interested in companies that are primed to grow or that you want to invest in for value over the long-term.

Technical analysis, on the other hand, looks at historical patterns in stock trading and pricing to try and predict a stock’s future movements and performance. To conduct technical analysis, you’ll want to study historical data and charts to find patterns and trends in stock price and volume. Technical analysts typically assume that all known fundamentals are already factored into a stock’s price and studying them further won’t help determine future opportunities. This strategy is often used by swing traders who are looking to buy and sell stocks in the short-term to reap profits.

Both fundamental analysis and technical analysis can help with picking stocks for your portfolio — but if trying to make sense of either one seems a little overwhelming, an online stock screener could help. Stock screeners are basically filters that help you find companies that fit your investment strategy, based on certain financial criteria. You can find free stock screeners online from tons of sources.

To use a stock screener, you’ll typically answer a few questions to help determine what kind of stocks you’re interested in. This could be based on industry, large cap vs. small cap stocks, price-to-earnings ratio, etc. The screener will then provide a snapshot view of the technical and fundamental factors of the selected stocks that fit your criteria. That way, you can get a feel for what a stock’s prospects are at a glance. Stock screeners can be a useful starting point for diving deep into stock analysis.

Decide whether you prefer passive or active trading.

Before you start adding stocks to your portfolio, you’ll want to consider whether you plan on actively trading or taking a passive investing approach. If you like the idea of buying and selling stocks in real time, day trading may be the approach for you. But picking stocks this way means that you have to be more hands-on when it comes to deciding what to buy or sell and when to execute trades. Passive investing is more of a hands-off investment strategy. With passive investing, the goal is usually to match the market in terms of performance, rather than trying to beat it.

A simple way to adopt a passive investment approach is to use index funds in your portfolio. An index fund is a type of mutual fund, which is a collection of different investments. Inside an index fund you can find individual stocks, bonds, and other securities.

Index funds track a specific stock market benchmark or index, such as the S&P 500 or the Dow Jones Industrial Average (DJIA). The investments inside the fund mirror the investments of the index it tracks. So, if the S&P 500 has a great year, the index funds you own that track that benchmark would theoretically do just as well. But keep in mind, if the S&P has a poor year, your funds will potentially do poorly as well.

Investing in index funds can be easier than picking an individual stock to invest in. Choosing individual stocks may generate higher returns in the short term, though it entails more risk and may lead to heavier losses, because your portfolio would be more heavily dependent on the success or failure of one single stock. This is where knowing your risk tolerance becomes important.

If you invest in index funds, make sure to watch out for expense ratios. An expense ratio reflects the annual cost of owning a mutual fund or exchange-traded fund (ETF), and it’s a fee you pay for the fund to be managed. Typically, index funds and index ETFs tend to have lower expense ratios than actively managed funds, as they require less work to manage. Regardless, it’s worth checking to see how much investing in a fund will cost before buying.

Pick the right place to trade stocks.

If you trade stocks or options individually, then you don’t have to worry about expense ratios, but you do have to keep commissions and other fees in mind. These are costs your brokerage or broker charges you to make a stock trade, either when buying shares or selling them. Most online brokerages have adopted a discounted trading model these days, charging low or no trading commissions at all to buy individual stocks and ETFs. With Ally Invest, you can trade thousands of stocks and ETFs commission-free — meaning you get to keep more of your returns.

Besides commissions and fees, you’ll also want to consider what else a brokerage or stock trading platform has to offer. For example, you might be looking for some in-depth research tools to help you compare stocks more easily. Or you might be looking for a robo-advisor experience to shape a portfolio on autopilot, according to your investment goals and preferences. Ally Invest, for example, offers both Self-Directed Trading and automated investing to help meet different investment strategy needs.

Knowing how to pick stocks isn’t an exact science, but it’s something you can get better at over time, with experience and practice. By being certain with the level of risk you’re willing to take on, setting clear goals, utilizing the right investment platform, and, of course, doing your research, you can make the most of your time in the market.

Research and invest in stocks commission-free with a Self-Directed Trading Account.