Whether you're buying a single stock or building a diversified portfolio, choosing wisely will have a good impact on the performance of your portfolio。So how to distinguish between reasonable investment？There are four steps to consider when analyzing potential equity investments.

Just as you choose a car, the investment should also support your goals。Your plan will indicate how long you want to keep your investment and how much risk you are willing to take。Certain investment objectives may exclude some volatile investments。For example, if you need funds in the short term (for example, to pay off your credit card or pay tuition), investing in volatile assets may expose this money to too much risk, thereby affecting your sense of security。Stock prices can fall rapidly, and so can your money-making plans。

That said, stocks are also one of the better opportunities for long-term growth。Holding stocks for a longer period of time (more than 10 years) usually reduces the risk of loss, which helps hold stocks to support long-term goals such as buying a home, children's education, caring for parents, or retirement。In order for this strategy to work, you need to be able to ride out market downturns, but it's not always easy。

When deciding how much risk you can take, you may consider how to balance your investments。In other words, what percentage of your portfolio is allocated to each investment type？All investments are risky, but risk usually increases with potential returns。That's why some investors make room in their portfolios for typically low-return investments like bonds to help balance out high-risk, potentially high-return investments like stocks.。

When you look at a stock, you may consider its market capitalization, the industry it belongs to, and where it fits your portfolio, and you may also consider its attractiveness to you。Do companies pay dividends?？What is the prospect of development？

Here are some key elements that can help you classify stocks and assess their potential:

Size: Many investors will consider the size of the company, a common measure is its market capitalization (also known as "market capitalization")。If you multiply the total number of shares outstanding by the company's current share price, this is the value of the company。For example, if Eric's Electronics has 30 shares with a market price of $4, the company's market value is $120 (30 shares * $4 per share = $120 market value)。

Valuations of small-cap companies typically range from 2.between $500 million and $2 billion; mid-cap companies are valued between $2 billion and $10 billion; large-cap companies are companies valued at $10 billion or more。But sometimes, market capitalization depends more on perceptions than a company's fundamentals。This is because some investors value stocks based on their intrinsic value, while others value stocks based on their apparent popularity or market sentiment.。With this in mind, companies often have certain similarities at different stages of growth。

Small-cap companies are often unproven - many show potential or could be takeover targets, but they also face growing pains。For example, can they expand beyond their existing customer base？Whether under pressure from incumbents or regulation？Small-cap companies may eventually become mid-cap or large-cap companies, but they may also fail and it is entirely possible to continue to be small-cap companies。

By contrast, large-cap companies tend to be more stable, with management experience and cash on hand - both of which help meet the challenges posed by competitors and maintain performance.。Overall, large-cap companies are more likely to pay dividends。You can find many large-cap stocks in the S & P 500, which brings together some of the largest publicly traded companies in the U.S.。

Industry: dividing all companies by the type of industry they belong to is the industry。For example, banks are part of the financial sector, Internet companies are seen as information technology or communications services, drug makers are in the healthcare sector, diaper manufacturers are an example of consumer goods, and so on.。There are many ways to divide, but as a common standard, the stock market is divided into 11 sectors, as defined by the Global Industry Classification Standard, a tool commonly used in the financial sector.。

When evaluating a potential stock investment, it is often helpful to compare it with other stocks in the same industry。Investing in many different industries can help you diversify your portfolio, and a strong performance in another industry can soften the blow of a weak performance in one industry。

Style: Style is not so much about companies as it is about how investors categorize their investments。"Growth investors" may look for companies that are expanding rapidly。Often, these companies receive extensive media coverage and are labeled as disruptors.。At the same time, "value investors" may be looking for companies they believe are underpriced。Both investment methods have their advantages and risks, so many investors hold both value and growth stocks.。

Dividends (or nothing): As a shareholder, your investment may be rewarded in two ways - ① the company's share price, where you can sell the investment for more than you pay; or ② you receive dividends, which are part of the profits that the company may pay to shareholders.。Not all companies pay dividends, but those that do pay dividends usually pay them regularly, usually quarterly。Although dividends cannot be guaranteed and can be cancelled or reduced without notice, it can provide investors with another source of income。

"Dividend yield" refers to the dividend paid by a company in the previous fiscal year divided by the company's share price, which can help investors understand the company's growth stage。Often, early-stage companies do not pay dividends to investors at all, preferring to continue to grow their businesses and develop new products。In contrast, more mature companies are more likely to offer investors higher dividend yields。High dividend yields also tend to be associated with companies that provide major goods or services, such as the consumer goods business。

As an investor, you may be faced with the question of how to handle dividends。Some investors choose to use the dividend to purchase additional shares or portions of the company, known as a dividend reinvestment plan or DRIP。These plans are usually offered by brokerage firms and sometimes by companies directly to their shareholders。

Individual issues or funds: If you are concerned about the pressure to pick one stock, you can buy a range of stocks through an exchange-traded fund (ETF) or mutual fund if you wish。This allows you to own multiple stocks at the same time, helps reduce the risk of choosing only one stock, and provides you with a degree of diversification。With ETFs and mutual funds, you can also find funds that focus on specific sectors or risk levels。

Whether investing in individual stocks or pre-packaged funds, the stock screener can help you categorize your investment choices based on size, industry, price and other metrics。Alternatively, some investors first analyze companies they are familiar with and compare them to similar companies。

Buying shares means being a part owner of the company。Consumers often look for well-managed and profitable products and want to pay a reasonable price。

To find that information, look at the company's financials。Publicly traded companies provide the Securities and Exchange Commission (SEC) and the public with their financial information, which can often be found on the SEC's EDGAR website or the company's investor relations page, including annual 10-K filings, quarterly earnings reports and other statements filed with regulators, and are often included in the stock profiles of brokerage platforms such as Robinhood.。

Here are a few ways to explain the contents:

Is the company growing?？Check their income。

Revenue is the total amount a company generates from the sale of goods and services。If it has grown this year compared to the previous year, this is usually a sign of growth; a better sign is an increase in net profit (the company's total revenue minus expenses)。

How much does the company earn?？Measuring Earnings Per Share。

Earnings per share (EPS) is a company's earnings divided by the total number of shares in the market。High EPS (or uptrending EPS) may indicate that the stock is healthy and a potential opportunity for investors。But be careful, earnings per share can also rise for a number of reasons, such as reverse stock splits。

Whether the stock price is "reasonable"？Check their P / E and P / S ratios。

If you are comparing two stocks, the price-to-earnings (P / E) ratio can reflect the relationship between the price investors pay for the stock and the company's earnings。(The indicator is often described as how much you paid for a dollar of earnings as an investor in the company。) At the same time, the price-to-sales ratio (P / S) compares a company's share price to its revenue (also known as sales)。

The price-to-earnings ratio is the current price of a stock divided by earnings per share.。For example, a P / E ratio of 20 to 25 means that investors will pay $20 to $25 for every $1 of earnings。A high price-to-earnings ratio usually means that investors expect higher returns, but it can also indicate that the stock is overpriced; a low price-to-earnings ratio may indicate that the stock is undervalued or may accurately reflect the company's limited prospects。

Some investors divide the price-to-earnings ratio by the company's expected growth rate for the coming year.。This provides a price-to-earnings ratio (PEG) that can help you determine whether a stock is likely to be overvalued or undervalued。PEG of 1 is considered fair value, while PEG greater than 1 may start to look expensive, while PEG less than 1 may look cheap。

At the same time, the price-to-sales ratio (P / S), also known as the "sales multiple" or "revenue multiple," can be calculated by dividing the company's market value by the revenue or total sales for a specific period, and you can also calculate the price-to-earnings ratio by dividing the company's stock price by the company's sales per share.。Comparing the P / E ratios of companies in the same industry can help you understand which companies are likely to be undervalued or overvalued。For example, suppose you are comparing three large technology companies, the first company has a P / E ratio of 6, while the other companies have P / E ratios of 4 and 2。The company with the lowest price-to-sales ratio in this example may be undervalued because its sales are high relative to its share price。(You may also encounter price-to-sales ratios based on projected sales for the year, called "forward ratios"。）

Liabilities?？Observing the Debt to Equity Ratio。

Some debt is normal, but it can be a warning sign if a company is heavily in debt。The debt-to-equity (D / E) ratio can help you compare stocks, which is measured by a company's total liabilities or debt divided by shareholder value。A D / E ratio of 1 or lower usually indicates that the company can repay its debt in the face of poor performance, and a high D / E ratio may indicate that the company is in trouble。However, relying on any single indicator in isolation can lead to poor analysis or investment decisions。In addition, please note that according to certain indicators, companies can perform well in the short term, but they cannot always maintain this performance-for a limited time, investments may look better than they actually are。

How Volatile Are Stocks?？

Knowing the volatility of a stock before choosing it gives you a better understanding of the stock you are buying。Beta indicator is a digital rating of stock volatility。

The beta compares the volatility of a stock with the overall movement of the market, indicating how sensitive the stock is to market movements。

The more volatile a stock or other traded investment is, the higher its beta tends to be - the less volatile it is, the lower the beta tends to be。While investments with lower beta are generally considered less risky, lower beta can also mean less chance of a return。

Is this a good deal?？Comparative Return on Equity。

Return on equity (ROE) is a measure of the extent to which a company converts equity into profits, similar to how investors measure investment returns。Return on equity is net income divided by shareholders' equity, which tells you how much of the minimum profit the company can earn for every dollar of value invested by shareholders in the company。When evaluating a company's ROE, it is necessary to compare it with similar companies, i.e., companies of the same industry and size。It is also useful to compare a company's recent return on equity with the return on equity of previous years to see if profitability is improving or deteriorating。

For example, suppose a bank called Earnest Pig had a 10% return on equity last year and shareholders generated 10 cents in profits for every dollar of equity they held.。To help understand whether this is good or bad, you can compare its ROE with other big banks and Earnest Pig's ROE in previous years。

How compared to competitors？View Analyst Reports。

Analyst reports can add quantitative and qualitative information to your research, such as assessing a company's competitive strengths and weaknesses, new products, and important consumer trends。Analyst reports also regularly focus on management, including stability, track record and operating costs of the business。

If you invest in an ETF or mutual fund, you can choose to do some of the same research on the fund's largest investments (called holdings)。

You can also compare the fund to an index (called a benchmark) that holds similar stocks。For example, the S & P 500 is the benchmark for large-cap stocks。

If you are investing in an actively managed mutual fund, the fund manager's long-term performance and track record can help you evaluate the fund's success over time。

You should also be aware of the fees associated with investment funds。The expense ratio is a measure of the costs associated with an investment fund。These costs include fees paid to the fund manager, transaction fees, taxes and other administrative costs and are deducted from the fund's return as a percentage of your overall investment。

A good way to evaluate a stock is to watch and track it for a while before becoming an investor。Data on past performance can provide some context about the stock, but putting yourself in a shareholder's shoes can sometimes give you a better idea of how to deal with a bumpy situation.。

Even if these and other factors are considered very carefully, you may face investment losses。So, keep in mind that diversification, asset allocation and research don't stop you from losing money。