Stock options look lucrative because they promise huge-huge return but investors have their limitations and it isn’t possible for an investor to invest in every option. A careful selection of options and the wise comparison is needed before choosing a holding.
Here’re six rules of choosing a better stock option
Rule One: Invest in the company that has an easy-to-understand business model. For example take McDonalds and Starbucks. If you have good understanding of a business than others, it is an edge that you can leverage for your personal gains. Another example of sustainable business is Coca Cola that is considered a trusted investment.
Rule Two: Stick to the “best in breed” companies. Here you need understanding the difference between a brand and best-in-breed business. Brand is more a word for retailing than investment. For example branding has no place in mining sector but it rules retail market. There are some sectors where brands don’t exist but it doesn’t mean that these businesses are unreliable.
Rule Three: The old saying that “past performance doesn’t reflect future results” could be misleading. While it is true that any business could start growing any time but would you want to invest in the company or organization that has lost the trust of shareholders. You should keep past performance of companies in mind when calculating their future growth.
Rule Four: While it could be a little bit difficult but it is better to avoid small-cap stocks. Your first preference should be for large and mid-cap holdings. These firms are called “best of breed” and they have more chances of growing than small-cap companies. This very tip is from the investment school of Benjamin Graham and Buffett.
Rule Five: Take interest in the businesses that pay out rich dividends to their stockholders. Now you can think of investing in Google as it is the largest and most popular search engine but you will feel discouraged on knowing that Google doesn’t give rich dividends but it doesn’t undermine its value of high investment stock. As a rule, you should make sure that a majority of your portfolio investment companies give rich dividends.