More average Americans are investing in the stock market these days. Learning how to pick stocks and choosing the best stocks to buy is not as complicated as it might appear. Wall Street is no longer the exclusive domain of stodgy investment professionals but a place where financial opportunities can knock even for beginners new to investing.

For those who have grown comfortable with investing in the market through mutual funds, exchange traded funds and the like, perhaps now the time is right to expand investment horizons further by learning how to pick stocks.

Finding the Best Stocks to Buy

An assortment of simple tools available to nearly everyone is all that is required to wisely choose the first stocks to pick and to get started in stock picking: life and work experience, personal interests and consumer insight.

These are the basic tools of the trade for all who engage in stock picking, from the beginner to Wall Street legends like Peter Lynch, former fund manager for Fidelity’s Magellan Fund. Lynch’s mantra, “invest in what you know” is precisely where the tools mentioned come into play.

An iron-clad investment truth is that an investor should never invest in something he does not understand. If she can not explain in a few sentences what a company does, what products it produces and how it makes money, then she does not know enough about the company to spend her hard earned money buying stock in it.

To “invest in what you know” means that an investor uses his own life experiences, work experiences, personal hobbies and interests and personal consumer savvy when searching for stocks to pick. For example, those who work in the auto industry, aerospace or oil and gas industry, are already something of experts when it comes to those particular industries and that is one place to start when looking for the best stocks to buy.

Similarly, the stocks of companies that produce products that an investor uses and favors, whether boats, clothing or ice cream is another good place to start when it comes to stock picking. Investors might stumble onto hot stock picks by visiting the local mall and observing that a particular retailer in flush with customers and always doing a booming trade.

How Not to Find Top Stock Picks

After discussing ways to find the best stocks to buy, prudence dictates a look at some ways of stock picking that are best avoided. A hot stock tip from a brother-in-law is usually not a good source for stock picking. Similarly, an unsolicited stock tip from brokers is often equally suspect. The broker may simply be attempting to move the firm’s inventory. Finally, a stock tip picked up from one of the many Wall Street talking heads that regularly appear on television financial news networks is often not the best resource for stock picking.

Not that it is impossible to garner top stock picks from those sources, but the point is every investor should do her own homework rather than relying on a stock tip from someone else.

Stock Picking Homework

Homework is where the rubber meets the road in stock picking. Once a stock has been identified as a possible candidate for investment, investors must drill down and learn more about the company, its financial situation and prospects for earnings. Earnings are what drive stock prices and picking stocks that will reap profits means picking stocks that show the best potential for price appreciation.

In years past, new investors were nearly shut out of the market information loop because the only effective way to obtain the kind of information an investor needs to do his homework was by subscribing to a commercial market watch analyst service costing hundreds of dollars a year. Thanks to the explosion of good financial information on the web, those days are past. Even the smallest and newest investors now have ready access to virtually all the information available to any investor on the market and that information can now be accessed free of charge.

One excellent source of information for beginning stock investors is MSN’s Money Central. StockScouter. Plugging a stock symbol into StockScouter will produce a wealth of useful information on virtually any of the stocks traded on the major exchanges. Information like: company profiles, key developments, recent news, earnings estimates, analyst ratings and recent financial results. StockScouter reports also includes a proprietary rating on the stocks entered, assigning a numerical value of 1 to 10 (10 being highest) that shows a particular stock’s expected risk and return potentials.

Anyone interested is getting started with stock picking need not be intimidated by the prospect. The basic tools are there and excellent information on which to base stock picking decisions is readily and freely available.

Reference

Lynch, Peter. Beating the Street. Revised Ed. New York: Simon & Schuster Publishing Group. 1994. Print.