How to Pick Stocks: 8 Things to Consider

When you buy a stock, you’re buying a small ownership stake in a business, which makes you a shareholder. As that business grows and changes, the stock’s value can rise or fall over time.

Choosing stocks isn’t about chasing a hot tip or trying to predict the market. It’s about learning how a company works and deciding whether investing in it would suit your financial goals and comfort level.

If you’re new to investing, this may feel unfamiliar at first. But once you know what to look for, evaluating stocks feels more manageable.

We’ll cover 8 common factors investors consider when evaluating stocks so you can better understand what matters and decide what fits your goals.

8 factors to consider when evaluating stocks

When people evaluate stocks, they often begin with why they’re investing and what they want their money to do over time. The factors below provide a framework for understanding how stocks are commonly reviewed and compared.

1. Start with your personal investing goals

“Before I invest, I like to know why I’m investing, whether that’s for college, a house or retirement,” says Sarah Sealey, Manager at Navy Federal Investment Services. “Knowing my goals helps me decide on how much risk I’m comfortable taking, how long I plan to invest for and how to best prepare to manage my emotional response when the stock price moves up and down.”

Investors with a longer timeline generally can take on more investing risk since they have time to recover from dips. People who have near-term financial goals often prefer to focus on companies with an established track record.

Also, think about your own tolerance for investing risk. For example, how would you feel if your portfolio dropped 20% in a bad quarter? Your answer could help you decide if you’d rather invest conservatively or aggressively.

2. Consider companies you’re familiar with

Many investors start researching companies they already buy from, interact with or believe in. Think about a retailer you shop at regularly or a tech platform you use every day. You may be able to more easily evaluate that company’s stock if you already know what it does, who its customers are and how it makes money.

3. Look for signs of financial strength

A stock’s price alone doesn’t tell you much. The health of the company matters more. “If you’re just starting out, I would look at simple things, such as whether the company is profitable, how much debt it has, if revenue is growing and whether it pays a steady dividend,” Sealey says.

Most of that type of information is free and publicly available on sites like Yahoo Finance and MarketWatch.

4. Review earnings reports

Every publicly traded company reports its financial results 4 times a year. You usually can find quarterly earnings reports on a company’s investor relations page. These reports typically include key financial statements like the company’s:

• balance sheet
• income statement
• cash flow statement

These earnings reports show you how a company performed compared with how analysts expected it to perform and can help you understand its financial position. 

You also can see if its performance is consistent over time. A company that regularly meets or exceeds expectations is generally stronger than one with inconsistent performance results. 

5. Inspect insider activity

Executives and board members are legally required to disclose when they buy or sell shares of their company’s stock. When insiders are buying, it can signal confidence in the company’s direction. When they sell, it isn’t always a red flag. People sell shares for all kinds of personal reasons. Think of insider activity as a single data point among many to consider. 

You can track insider transaction filings for free with the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system managed by the U.S. Securities and Exchange Commission (SEC).

6. Evaluate the stock’s overall trends

Take a look at how the stock you’re researching has performed over time. Does it have steady long-term growth, or does it reflect a lot of market volatility? Short-term dips are normal. Even strong companies have bad quarters. “I remind myself that stock prices go up and down all the time,” Sealey says. “A few bad days don’t mean a company is failing. It’s better to look at the long-term trend instead of worrying about short-term changes.”

Consider using multiple timeframes—like 1 year, 3 years and 5 years—to understand the stock’s long-term trend. And, keep in mind that past performance doesn’t guarantee future results.

7. Check key performance indicators

Several key metrics used in fundamental analysis can help you evaluate if a stock is priced fairly and performing well when compared with its peers. You don’t need to use every metric or use them all at once. Understanding a few common indicators can help you compare the stocks that you’re considering buying.

• Price-to-earnings (P/E) ratio. The P/E ratio compares a stock’s price to the company’s earnings per share. This metric is a cornerstone of technical analysis.
• 52-week high and low. Sometimes called support levels and resistance levels, the 52-week high and low show where the current price sits relative to its range over the past year. 
• Moving average. Moving average is the average of a stock’s closing prices over a defined period, such as 20 days. It helps identify trends and gives context to the stock’s price.
• Dividend yield. The dividend yield can be important if steady income through dividend-paying stocks is part of your investment strategy. 
• Sector performance. Sector performance helps you see if the stock is doing better or worse than competitors in the same industry.

One simple metric shown on many stock quotes is called beta. The number reflects how much a stock tends to rise or fall compared with the S&P 500. For example, a beta of 1.00 means it moves about the same. A beta of 1.25 means it moves about 25% more than the broader market. 

“I ask myself if I’m comfortable with that level of price movement and risk,” Sealey says. If the stock’s swings would keep you up at night, it may not be the right fit for your goals or timeline.

8. Plan for risk management

A diversified portfolio has investments spread across multiple companies, industries and asset types. This can help reduce investing risk in your portfolio. If the value of one stock drops, the rest of your holdings could help balance out that loss. Exchange-traded funds (ETFs) and mutual funds are popular ways to diversify. By design, these fund types hold a broad mix of investments.

You should know that diversification itself won’t necessarily assure you’ll earn a profit, nor does it guarantee against loss in a declining market. That’s why carefully evaluating where you’ll put your money is so important.

How to buy stocks

Once you’ve done your research and decided which stocks you want to invest in, the buying process is fairly straightforward. This overview can help you understand the typical steps involved in buying a stock.

1. Open a brokerage account

To buy stocks, you’ll need an account with a brokerage or investment platform. Navy Federal Investment Services, for example, offers both self-directed and automated investing options through Digital Investor.

2. Decide how much to invest

Before you place a trade, think about how much of your portfolio you want to put into a single stock. In a diversified portfolio, no single investment should make up a large portion of the holdings.

3. Choose your order type

When you’re ready to buy, you’ll need to select a stock order type. For example, a market order lets you buy the stock at the current price. With a limit order, you set the maximum price you’re willing to pay.

4. Place the trade and monitor your investment

Once your order goes through, keep an eye on how your investment is performing over time. Try not to react to short-term fluctuations. Remember: Time in the market is better than timing the market.

Common stock-picking mistakes to avoid

Even investors who do plenty of research can fall into some predictable traps. Being aware of these 4 common mistakes can help you make thoughtful decisions as you add stocks to your investing portfolio.

Mistake 1: Letting emotions drive decisions

“Try not to let emotions control your financial decisions, especially during times when prices move a lot,” Sealey says. Investors who focus on research and strategy are often better able to tune out day-to-day market noise. 

Mistake 2: Fixating on short‑term market moves

Stock prices can change a lot, which can make individual stocks a risky investment—especially if you need the money in less than 3 years, Sealey says. Market ups and downs are normal, and decisions based on every market swing can affect longer-term investing goals. Staying the course during short-term volatility can be easier when you have a long-term strategy.

Mistake 3: Underestimating risk

Every stock carries some amount of risk, and it’s important to understand how much investing risk you can comfortably take on. Some investors use simple frameworks to help keep risk in check and make balanced decisions. One example you may hear about is the 3-5-7 rule, which some investors use as a way to think about risk. It’s simply one possible approach that some people use to limit making decisions based on emotions.

Mistake 4: Overlooking portfolio diversification

Putting too much of your portfolio investments into a single company or sector can increase risk over time. Many investors choose to diversify their portfolio by spreading their investments across different companies and industries.

Start investing with Navy Federal

Learning how to pick stocks gets easier with experience, and we’re here to help. Check out our MakingCents library of articles on investing to keep building your knowledge. You can find information on how to start investing, investment strategy ideas, wealth-building tips and a guide to choosing investments based on your current age.

When you’re ready to invest in stocks, a Navy Federal Investment Services financial advisor can work with you to develop a personalized investment strategy. For a more hands-off approach, Digital Investor can build and manage a diversified portfolio automatically based on your risk tolerance and timeline.