Selecting the top 5 stocks to invest in from the 10,000 available requires screening for specific criteria. There are many stock selection methods including style box reviews, asset class analysis, industry analysis, and income or price appreciation. Most analysts recommend a diverse portfolio.
Opinions about the best stocks to invest in have been printed in newspapers since the New York Stock Exchange began reporting ending daily stock prices, but cable television and the internet created instant access for investors. Today most brokerage companies publish a recommended portfolio divided into common categories (usually industries or asset class). The categories are weighted according the analysts' recommended asset allocation. The portfolio is adjusted as the market shifts and forecasted opinions about individual stocks change.
To select the top 5 stocks, investors should consider their investment objective, risk tolerance, current portfolio asset allocation, and the amount of money available for investment. Owning the top 5 stocks in the same portfolio would include a diverse asset allocation. The amount invested in each stock would be adjusted to meet the needs of the individual.
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Online stock screeners allow investors to select criteria to find matching stock picks. The top 5 stocks to invest in would have the following characteristics: Aggressive Growth – Look for stocks in new or rapidly expanding industries. Stocks in this category are considered risky and volatile. They have the potential for large swings in price (both up and down). The 5 year earnings growth rate would be at least 30%. Growth – These stocks are in an industry projected to experience continued growth. Profits are reinvested in the company, so they may not pay dividends. The price to earnings ratio shows a steady upward trend. The five year earnings growth rate would be 20%. Growth & Income – Larger companies pay dividends and have increasing price appreciation. They are usually industry leaders with enough market share to redirect some profits back to stockholders. Return on equity should be at least 10% with a dividend yield of at least ½ %. Income – The stock has a history of paying high dividends, preferably increasing in amount. Income stocks are typically larger organizations in mature industries. The dividend yield should be at least 4%. Foreign stocks – Investing in companies outside the United States allows you to take advantage of markets that may be going up as US markets are going down. Look for American Depository Receipts (ADRs) in growing world markets. ADRs can be found in all of the other stock categories. They may be considered more risky than domestic companies because of the added risk of currency exchange rates, foreign government involvement, and laxed financial reporting.
There is no one stock category that performs better than all others over time. Ibbotson has tracked the performance of investments for decades and shows clearly that any one category could be up one year and down the next. A diversified portfolio is shown to perform better than attempts to guest the top leader.
The top 5 stocks to invest in should have a history of increasing PE ratios, Increasing revenue, a risk level in line with the investors tolerance level, and projections of continued positive returns.
Some investors use "timing" to select stocks based on whether they believe the price will move up or down. Charting stock prices or total returns to interpret the next stock move involves careful daily analysis.