Researching Stocks: Determining your Investor Profile (Part One)

If you’re like me, you read the financial times everyday, you have your Bloomberg certification in equities, and you get a rush out of buying and selling stock. But if you are like many college grads, even finance majors, you might have not yet taken the plunge to actually purchase shares of stock. Or if you have, you feel like you did it all wrong and want more information to do it right this time. Here is what I suggest to get started in investing in the stock market.

I was fortunate enough to take a class entitled “Investments”, which gave us a hypothetical 10 million dollar portfolio to invest for “clients” (two members of the class). I will try to impart this valuable information as best I can in the space allotted me, but this is by no means a complete overview of everything you should look at. Start reading the Financial Times or the Wall Street Journal everyday. Educate yourself so you do not fall victim to the many financial advisors out there that really don’t know what they are doing. If you don’t have the time to do it yourself, at least initially take the time to find an advisor or financial planner with a proven track record. Ask older friends and acquaintances for referrals- especially those in the finance industry. And whatever you do, please don’t just walk into Bank of America and talk to one of their advisors. They do not have your best interests in mind and most likely have only a limited list of investments to choose from. They don’t make any money off of ETF’s or index funds, so all you will hear about is mutual funds. They don’t want you to know that other, more profitable, more efficient investments are out there.
But if you do want to try it yourself and register at Scott Trade, Etrade, or another online brokerage firm, here is what I suggest to do. Researching a stock should be a long and methodical process, and investing in stocks based upon a “whim”, a “hot stock tip from your friend”, or what BusinessWeek tells you isn’t the best method.

The first thing you must do is determine your investing profile. Do you want small companies with higher risk but more potential for higher returns?(small-cap stocks) Do you want more stable, less risky stocks positioned for growth?(large-cap stocks?)
You want to figure out your own:
a. Target return.
b. Investment horizon.
c. Maximum risk.
d. Constraints.
To find out your risk profile and what returns you can expect based upon that level of risk, try one of these investor questionnaires:
http://www.alpha-omega-inc.com/CalcQuest.htm
http://www.movidea.com/BP_educ/html/question.htm
http://cgi.money.cnn.com/tools/assetallocwizard/assetallocwizard.html
http://www.smartmoney.com/oneasset/index.cfm?story=intro

These tools will also help you determine what allocation of your portfolio you should have in each asset class. If you are a college graduate, you know I’ve said earlier to start early. If you have a lot of time to invest, now is the time to try riskier investments such as small-cap stocks, index funds, or ETF’s and international stocks, index funds, or ETF’s.