Choosing the right stock for your portfolio can be a nerve-racking decision. There is no full proof way to pick the perfect stock that will double over the next 12 months, but there are certain rules that you should follow to make sure you are comfortable about your investment. These rules are totally different from the reason that cause you to choose one stock over another but reflects due diligence that should go into any investment you decide to pull the trigger on.

When you do decide to pick a stock as an investment you should understand how it fits into your portfolio. Does it provide diversity? Is it redundant to other stocks you own? Are you in it for the long term? Diversification is an essential component to any investment portfolio. This prevents you from loading up on too much of one kind of stock and in a worst case scenario if something happens and the entire sector goes down you won’t be totally screwed.

Does an investment fit your risk profile? If you live in constant fear of losing money in the stock market then that means you have a low risk stock profile. There is nothing wrong with that but the type of investments you pick should reflect your risk appetite. If your stock goes down 5% in one day will that make you want to sell? If that is the case then you should stick to less risky investments.

The following rules are designed for you to use once you have decided about your portfolio's diversification and personal risk profile. The next step is to do your due diligence on the company’s stock you want to purchase. The simplest rule to follow when you are just getting started in the stock market is to buy what you know. There are tens of thousands of stocks in the stock market and some of them you will never have heard of, but you already know some of the major ones like Netflix, Apple, Facebook and Google. You use the products of some of these companies every day so to that end you should be invested in them.

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1. Create a thesis on why you want to own this particular stock

A thesis is really just a fancy word for, a plan. What is your plan for your investment? Using the world’s biggest public company Apple as an example; You may be an avid Apple user and you realize that they have the largest market share of smartphones in the world. You also have realized that you have owned every iPhone that has ever been made and to that end Apple makes for a good investment in your eyes. Or, you just realized that Facebook owns Instagram and you are basically an Instagram addict. Knowing that you love Instagram, you figure that the rest of the world will probably love it too making it a good investment in your eyes.

Although we preach that investing in what you know is a great place to start it does not always translate into a good investment. You may be a Coke (Coca-Cola) addict, but as an investment Coca Cola the company has languished over the past five years (+16%) compared to its closest competitor Pepsi which is up over twice as much (+36%). Now you may not have lost money if you invested with Coca-Cola over the past five years but you would have been better off invested in other stocks. So knowing the company and the product is only a part of the story.

2. Determine how long you want to own the stock for

This is one of the most important parts of planning your investment portfolio. If you are investing for retirement then you can wait over the long term 15, 20 or even 30 years. So what happens over the next couple weeks or months is totally inconsequential. But if you are investing in the short term, then your strategy may be totally different. Case in point, My wife and I are currently involved in the STASH Couple’s Challenge. That involves having a narrow focus over which stocks are best suited to invest in over a 12 month time frame. If you are using STASH then you want to have at least a 6-month investment time frame for any investment. This is because STASH is not a normal brokerage account, and you are less capable of controlling your buy-in price compared to some of the other brokerages. You are less capable of easily exiting a trade on a particular stock in STASH compared to other brokerages. If you are more interesting in trading stocks you should be using an app like Robinhood instead.

3. Determine what will make the stock go up

Buying a stock and expecting it to go up just because it has in the past is the equivalent of throwing money into a wising well. We live in the technological age where almost anything you want to find out is at your fingertips. To that end you should have a pretty good idea as to what will cause your stock to go higher. In the case of Apple, will it be that they need to sell more iPhones? For Home Depot, are lower interests rates the catalyst that leads to more home remodels? With Disney, is the release of another Avengers movie the catalyst to drive the stock higher? A great place to start is listening to the latest earnings call or reading the transcript for that earnings call for the company that you are interested in purchasing. You can usually tell what the money making moves for any company are by looking at their earnings. It’s basically the report card for any company and if you want to invest in any company you should check their report card.

4. What will make the stock go down

I know we live in a world where most people like to think positively. However in the stock market that can be a dangerous way to lose money. In fact its better to know your companies weaknesses. That way you can possibly plan an exit before the stock starts tanking. Is the iPhone not as big of a hit as apple expected? Has Facebook’s security issues caused people to stop using the service thus limiting its value? As investors these are rightful questions that you want to ask, but you will also need to weigh it against your thesis for why the stock is going up.

5. Who is the company’s biggest competitor

Almost ever company has a major competitor/nemesis. We already discussed Coke and Pepsi. In regards to smartphones, Samsung appears to be Apple’s biggest competitor. For Microsoft, PlayStation is their biggest gaming console competitor but Google and Amazon are their cloud computing competitors. The bigger the company, the wider the diversity of their business the more potential for more than one competitor. Knowing the company’s competitor and keeping tabs on them will help you better understand your own investment.

6. Know what product(s) the company sells

Every company in the stock market is selling a product. For some companies that product is a physical entity, for another it’s a service, or software. It is important to understand how that product portfolio affects the bottom line of any company. Amazon is a great example of a company with millions of individual products, but in reality their number one product is a service, their website and the accompanying Prime membership status. To understand Amazon is to understand how the company’s strategy is centered around becoming a global e-commerce leader.

7. Look at the earnings report for the last year (4 quarters)

A year (12 months) in the life of a public company means that they have documented how well their business is doing at least 4 times (every 3 months). In the world of wall street analysts are assigned to cover specific stocks. These analysts also come up with expectations/estimates for what they think the earnings will be for each company. The companies that typically beat earnings estimates usually see their stock go higher as a result. Reviewing a company’s earnings will also give you a better idea about what your investment is being used for. Would you want to invest in a company that reports making less money every time they report earnings? Probably not, but a company that has demonstrated an ability to keep growing their earnings potential makes them a good investment. You can go to any number of financial websites to uncover this information. Two of my favorite places to look are on Yahoo Finance and Market Watch. Most of everything you need should be at your fingertips.

8. Go to the company website

I created this rule myself after talking with people who were invested in companies that had never even visited the company’s website much less know what the company does or sells. On the company’s website is where you can find a lot of research about the company including press releases. You can also get a better idea about the executive team that runs the company, your investment. I have a simple rule, if you can’t tell what a company is selling from their website then you shouldn’t be investing in them.


Think of these rules as a homework assignment. You are were willing to do homework to get good grades once. Well in the real world this homework leads to something better than a grade, it can actually make you some money. Now I know that you value the money you have saved and you are nervous about losing it all in the stock market. I won’t say that a stock you pick will never go down, but if you do your homework and stay committed there is a very good chance that you will end up on the positive side of the equation more often than not. Besides, aren’t you tired of everyone else making money and unlocking all the secrets to becoming financially wealthy? Now is your time to take a risk, you just might thank me for it later.