1. Look at the external environment

The macroeconomic environment is usually a good place to start. Global economic conditions have a significant impact on the overall stock market - a booming economy is usually a good sign for many stocks, while a recession will likely see stock markets decline.

The big picture can help you quickly zoom in to specific sectors to invest in.

For instance, travel and hospitality stocks took a big hit from the COVID-19 pandemic when borders closed. But basic necessities such as grocery products and "stay-at-home" stocks that include e-commerce and tech companies thrived.

Stocks such as supermarket chains grew tremendously while streaming services such as Netflix and Spotify saw stock prices hit record highs.

Other factors to consider include government policy and regulations, which can have a sizable impact on an industry or sector.

One trend to look out for now is climate change. As governments prioritise sustainability and introduce measures to grow the green economy, electric cars and solar energy companies have experienced strong rises in their stock prices.

 

2. The devil’s in the details

After scanning the macro environment to see which sector is worth investing in, the next step is to look at individual companies.

One way to assess individual companies is by looking at their profit levels. Broadly speaking, you want to invest in a company that is consistently making money over time. Sometimes, these companies will also have a dividend policy, which rewards shareholders with a regular stream of cash.

Known as blue-chip companies, these large enterprises with a proven track record of success and stable growth include Nestle in Switzerland, Unilever in the United Kingdom, and Singapore Technologies Engineering in Singapore.

But not all investors want stable income-generating companies. Some investors want to invest in growth companies - companies which may be small and loss-making now, but offer the promise of becoming large and stable businesses some years in the future.

Such growth companies, if they do end up delivering on their promise, can yield investors, especially those who bought their stock early on in their journey, huge returns. For example, if you had invested US$1,000 in Amazon.com when it first listed on the stock market in 1997, you would be holding approximately US$$218,793.08 today.

Growth stocks tend to be a high-risk, high-return strategy. It would be useful for investors to first understand whether they are more suited for a less or more risky approach to investing.

Management counts

While many investors tend to study numbers and financial ratios, one key factor that they often forget about is the management team.

A company is only as good as its leaders’ ability to plot a course and steer the enterprise.

This is where investors will have to spend a bit of time understanding the company’s strategy, its vision and the team looking to execute the vision.

There is no magic formula to assessing a company’s management team but it is essential that the investor is comfortable with the vision that the management team has set out.

To this end, investors can get a strong sense of the management through investor calls, annual general meetings and interviews with the financial press.  

 

Go your own way

It is said that the best risk an investor can make is a calculated one.

Rather than buying into a stock because everyone else is doing so, it is crucial for investors to do their own research by looking at the big picture, delving into the details, and understanding the management team’s goals and plans.