How to Choose a Stock to Invest In

If you want to invest in individual stocks, the first question you are likely to ask is: Which stocks should I buy? With the massive number of stocks available, narrowing your search down to one specific stock can be very difficult. This guide from moneyland.ch gives you reference points that can help you in your search. Ask yourself the following questions, and only invest in a stock if you can answer them.

1. How well do I know the company?

Do not invest in anything that you do not understand. That old adage has not lost any of its truth over time. You should only buy shares in a company if you have at least a general understanding of its products, its business model, and its industry sector. Additionally, you should take the time to research information about companies that you find interesting. Otherwise, you may want to avoid investing in individual stocks at all. From a financial perspective, it is generally safer to invest in the stock market using stock ETFs or index funds.

2. Will the industry sector grow in the future?

You do not necessarily need to get a degree in economics, but as an active investor, it is helpful to be able to track the development of an industry sector and the world economy. The prices of stocks can tell you a lot about whether or not an industry sector is likely to grow in the future.

The stock of US electronics company Nvidia is a good example. This company’s products play a key role in the development of artificial intelligence (AI). Since the beginning of 2024, the company’s stock has skyrocketed, resulting in major gains for investors who understood its potential.

However, it is important that you do not only invest in short-lived trends, as doing this can quickly result in substantial losses. It is also impossible to accurately predict how a stock’s price will move in the future. Past performance is not an accurate indicator of future performance.

3. How established is the company?

For inexperienced investors, in particular, it is generally a good idea to stick with strong, established brands. If a company has proven itself on the market for a longer period of time, it is likely that its business model will continue to work in the future. The stocks of established companies normally offer stability. Make sure to account for the market positions of stocks when choosing how to invest.

Young, relatively untested companies are often exposed to strong price fluctuations. While these fluctuations enable strong gains in a short amount of time, they also enable major losses or even a complete loss. Be aware though, that it is theoretically possible to suffer high losses when you invest in established companies too. That could be the case, for example, if the company’s business model becomes obsolete.

4. What do the numbers tell you about the company?

Looking at the naked figures can also help you choose the right stock. There are a number of indicators that can help you to better understand a stock’s real value. These figures also give you a reference point for determining a company’s financial health. The study of these figures is called fundamental analysis. Examples of important figures include the price-to-earnings ratio (P/E) and the price-to-cash-flow ratio (P/CF).

Important: While this data can help you understand whether a stock is underpriced or overpriced, it cannot accurately predict how a stock’s price will perform in the future. You can find more on this topic in the moneyland.ch guide to stock valuation.

5. Does the company pay dividends?

Check whether a company pays out dividends, and how high the dividends are. If a company has reliably paid out dividends for many years, that is often a sign that the company’s business operations are solid and sustainable. If you follow a dividend strategy, then dividends will play an even bigger role in choosing a stock.

But here too, it is important not to overemphasize dividends. Just because a company does not pay out dividends, you should not automatically look at that as a weakness. In some cases, very high dividends can even be a warning signal. You can find more information in the moneyland.ch guide to investing in dividend stocks.

6. Which currency is the stock denominated in?

The performance of a stock, for you as a Swiss investor, is also affected by the currency that it is traded in. When you buy a stock that is denominated in a foreign currency, you bear the risk of that currency losing value against the Swiss franc. A devaluation of that currency would negatively impact the performance, while a strengthening of the currency would positively affect your investment. Additionally, many stock brokers charge you currency exchange commissions for converting to and from Swiss francs when you buy and sell. These costs reduce your returns.

7. Which country is the company headquartered in?

A company is always dependent on the political and economic situation in the country that it is domiciled in, and that its stock is listed in. If the country in which a company is headquartered experiences financial, economic, or political crises, those crises can negatively impact the stock’s price. Even healthy companies can be caught up in a negative downward cycle. For that reason, it is important to account for the country or region in which a company is headquartered or does business in.

8. How has the stock’s price developed in the past?

There is no way to accurately predict the future, but you can look at past developments. A stock’s past performance can, in some cases, provides hints as to how a stock will perform in the future. If, for example, a stock’s price has historically been very volatile, that could hint at similar fluctuations in the future. But here too, you should bear in mind that there is no sure way to predict future developments.

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A guide to stock dividends