How to Pick Stocks in 5 Steps

People throw around the term "stock picking," and investors often brag about their skilled analysis or good timing. But in reality, picking stocks is a mix of luck and analysis — it's very easy to get wrong, and hard to get right.

No matter what investments you choose, all roads lead to a common goal — growing your money over time. The best way to do that is often not through individual stocks, which can be extremely volatile and require you to concentrate your risk within a single company or handful of companies.

Here are some strategies for picking stocks and other investments.

1. Open an investment account

In order to buy stocks, or any investment, you'll need to open an investment account through a broker. There are several types of investment accounts, and it's worth knowing the differences so you can get the one that is right for you. For instance, a Roth IRA offers great tax benefits, while standard brokerage accounts do not.

In addition to picking the type of investment account you want to open you'll also need to choose a brokerage to open it with. Some brokers, like Fidelity, have been in business for many years and are famous for their 24/7 customer service. Others, like Robinhood, have fantastic apps that make investing from your phone really easy. It's a good idea to pick through the details to figure out which broker excels in the categories you care most about.

» Ready to get started? See the best brokers for beginners

2. Index funds — not individual stocks — can anchor your portfolio

Instead of fretting about which specific stocks to invest in, consider index funds. Index funds (for example, those tracking the S&P 500 Index) are good first investments because they offer a simple way to gain exposure to the market without the need to buy all the stocks within the index.

Index funds often include many of the stocks most people will want to invest in. For instance, an S&P 500 index fund includes Apple, Amazon, Google and Tesla — plus hundreds of others. Index funds are easy to invest in, they carry low management fees (what’s known as expense ratios), and their returns are less volatile because they track the performance of an index. Finally, these assets offer diversification, which is key to long-term investing success. Owning a variety of assets decreases your portfolio’s risk, ensuring you don’t get burned by any one investment.

3. Individual stocks can come next

Most financial advisors recommend holding the majority of your portfolio in low-cost index funds, and then, if you want, holding between 5% and 10% in individual stocks or other higher-risk investments.

» Read more: How to invest in stocks

With individual stocks, starting small is a prudent strategy, and there’s no better education than firsthand experience. Make sure you have a solid understanding of the company you want to invest in, some context about its stock price and the basics of trading before you begin. (We have a full article on how to research stocks.)

In general, heed Warren Buffett’s advice: “Buy into a company because you want to own it, not because you want the stock to go up.” If you're looking for some inspiration on which stocks to buy, here are some of the best-performing stocks.

4. Aim for diversification

If you find yourself getting tempted by a “hot” tip that your best friend’s sister’s boyfriend’s brother’s girlfriend heard from some guy, take a deep breath. While it’s good to feel comfortable investing, it’s bad to be overly confident. Even professional investors regularly get burned, and consistency, rather than a hot hand, begets long-term success.

Instead of chasing tips, dive into your portfolio. Are there holes in your diversification strategy that could use patching? For example, if you own numerous individual stocks within a specific industry (like technology), it may be wise to add stocks, or even index funds that track other industries (say, health care). Here are some potential industries you can explore:

• AI stocks

• Oil stocks

• Healthcare stocks

• Technology stocks

• Marijuana stocks

5. Stay invested for the long term

Regardless of what you decide to invest in, it’s important to maintain consistency by regularly adding money and investments to your investment portfolio and tweaking your strategy over time, as necessary.

With any new investment you consider, make sure you understand how it works before plopping down money, and never sacrifice the pillars of your portfolio in the process. But by all means, have some fun. Staying engaged in the management of your portfolio will ensure you stay invested for the long haul.