How do investors know what stocks to invest in, and when?

The proccess of finding exactly what stocks you would personally like to invest in is no simple task, it takes research, and understanding of what the company does and why they should be profitable in a given time period.

Advice: Look around the world itself, and take a deeper look into the companies around you. Companies like Apple, Coca-Cola, Disney, and Exxon are all compaines that are all around us, and massively profitable due to the reach they truly have in our world. Take a moment to think about what comapanies you give money to on a daily basis, or what companies meet your personal needs the most and think of investing your money into those companies.

Finding the right companies and knowing when to invest in them is the core of successful stock investing. The process primarily involves Fundamental Analysis to evaluate the company's true value, and then an assessment of the current stock price.

Here is a breakdown of how to approach both questions:

Part 1: How to Know What Companies to Invest In (Fundamental Analysis)

The goal is to determine a company's intrinsic value (its true worth) and compare it to the current stock price. If the intrinsic value is higher than the market price, the stock is considered undervalued and may be a good investment.

A. Research the Company's Business

• Core Business and Future Demand:

  • How does the company make money? What products or services does it sell?

  • Do you believe the product or service will be in demand for the long term? (e.g., Is it a product that could be replaced by new technology in a few years?)

• Competitive Advantage (The "Moat"):

  • What makes this company better than its competitors? This could be a strong brand, unique technology, low production costs, or high barriers to entry for new competitors.

• Industry and Economic Factors:

  • How is the industry as a whole performing?

  • What are the major risks (economic, political, or technological) the company faces?

• Management Quality:

  • Are the managers and board of directors talented, experienced, and trustworthy? You can look at their past performance and how they communicate with shareholders.

B. Analyze the Financial Health (Quantitative Analysis)

You should look at the company's public documents, such as the quarterly ($10-Q) and annual ($10-K) reports, which are filed with the SEC and often available on the company's investor relations website or the EDGAR database.

• Financial Statements:

  • Income Statement: Look at Revenue (Sales) and Net Income (Profit/Loss). Is the company consistently growing its revenue and earnings?

  • Balance Sheet: Look at Assets versus Liabilities (debt). Does the company have a healthy amount of cash and not too much debt?

  • Cash Flow Statement: How much cash is the business actually generating from its operations?

• Key Financial Ratios:

  • Price-to-Earnings Ratio (P/E): Calculates the stock price divided by the Earnings Per Share (EPS). A lower P/E compared to competitors or the broader market may suggest the stock is undervalued, but it varies widely by industry.

  • Debt-to-Equity Ratio (D/E): Compares a company's total liabilities to its shareholder equity. A high ratio indicates the company is using a lot of debt to fund its operations, which can be risky.

  • Earnings Per Share (EPS): The portion of a company's profit allocated to each share of stock. Consistent EPS growth is generally a positive sign.

C. Valuation Methods

To determine the intrinsic value, analysts use several methods:

Method Type What it Does Discounted Cash Flow (DCF) Absolute Estimates a stock's value by calculating the present value of its expected future cash flows. It's often considered the most comprehensive method. Dividend Discount Model (DDM) Absolute Assumes a stock's value is the present value of all its future dividend payments. Only applicable for companies that pay dividends. Comparable Company Analysis Relative Compares the target company's financial multiples (like P/E, P/S) to similar companies in the same industry to see if it is trading cheaply or expensively relative to peers.

Part 2: When to Invest in Companies (Market Timing)

For long-term investors, the saying is often "Time in the market beats timing the market." This means that consistently investing is more important than trying to perfectly predict the best day, week, or month to buy.

However, once you have identified a quality, undervalued company, here are a few things to consider regarding timing:

A. The "Best" Time is When a Stock is Undervalued

The most important factor for an individual stock is its valuation. The ideal time to buy is when your analysis shows the stock's price is below its calculated intrinsic value. This often happens when:

• The overall market has a sharp decline (a correction or crash).

• The company releases temporary, bad news (e.g., a short-term earnings miss, a product recall, or a key executive departure) that causes a price drop but doesn't fundamentally change its long-term prospects.

B. Market Volatility Patterns (for Shorter-Term Focus)

Historical data can show trends in market volatility, but these are not guaranteed to repeat and are generally more relevant for traders than long-term investors.

TimeframeCommon Belief/TrendNotes Time of Day First hour (9:30 a.m. - 10:30 a.m. ET) and Last hour (3:00 p.m. - 4:00 p.m. ET)These periods are often the most volatile as news from overnight is digested and closing trades are placed, creating opportunities for larger price swings. The mid-day tends to be calmer. Day of Week Mondays Some theories suggest Mondays can see stocks trend down as the weekend's bad news is factored in, making it a good day to buy. Fridays can also be volatile.Month of YearSeptember is historically a weak month. November, December, and January are often seen as stronger months.This is based on historical averages and is highly unreliable for predicting any single year.

The Bottom Line on Timing: For most investors, trying to time the market based on the clock or calendar is a losing game. The most effective strategy is to:

1. Do your research to find a fundamentally strong company (Part 1).

2. Determine your target price (what you believe the stock is worth).

3. Buy the stock when the market price falls to or below that target price.

4. Invest consistently (Dollar-Cost Averaging) to smooth out the impact of short-term price fluctuations.