As an investor, you likely already know that investing in individual stocks can be an ideal way to augment your existing portfolio. However, while most beginners tend to start out with a lower-cost mutual fund that covers a group of myriad stocks, individual stocks can carry more risk and as such, are usually reserved for more experienced or risk-averse investors.

The reason behind this logic is that with a mutual fund, its performance is riding not only on one or two individual performers, but on the group as a whole. This means that if one stock underperforms but another is strong, the general movement may remain upward. On the other hand, declines and increases on individual stocks can be sharper and more dramatic, making it all the more important that you develop an investing strategy before taking them on.

Before you buy stock in an individual company and essentially become part-owner in it, there are a few things to keep in mind. The below tips can help you navigate a successful and profitable investment strategy.

1. Start with the familiar.

Sure, there might be a new tech trend sweeping the nation. Yet, unless you’re familiar with it and have patronized the business yourself, you may not know what you’re getting into. To this end, start simple and research companies you already know and like. For instance, do you spend hours a day at your Macbook? Take a look at Apple.

From chain restaurants to your favorite retail brands, there are myriad possibilities to consider. Of course, you’ll need to analyze their earnings report to make sure they’re a good match with a solid long-term forecast of growth, but it will help if you aren’t having to learn about the company in the process.

2. Make sure the company has a plan.

In today’s startup craze, it seems as though every day, there is another new business popping up with plans to make major innovative leaps and change the way we do everything from fold our laundry to order groceries online. In many cases, these goals are attainable and the company is worth looking into. Yet, you want to invest in a company that has a solid and straightforward plan for developing and sustaining growth.

Take a look at what happened with the dot-com bubble. There were so many up-and-coming niche companies seeking to capitalize on that fervor, but few had the plans and infrastructure in place to actually make money and maintain a healthy bottom line. As a result, investors who bought stock in these companies soon realized that a passionate promise is only that, and unless operations match visions, you could end up losing on your investment.

3. Learn about value investing.

In short, value investors look for stocks that are high-performing, but carry a low price tag. In this case, these types of stocks are considered undervalued. You can look into this by determining each company’s Price-to-Earnings (P/E) ratio, which you can calculate by simply dividing its share price by its net income. That will give you a general idea of how much investors are paying per dollar that the company earns. A P/E of less than 15 is usually considered undervalued or cheap, while one of 20 or more is pricey.

Of course, like most investment tactics, this one isn’t cut and dry. Take a look at how long the company has been around. If it’s a promising up-and-comer with accelerated growth, the price point might be higher than one that has been around for decades. In this case, don’t compare apples to oranges. Take a look at how other peer companies that share similar attributes are performing and make your analysis from there.

Also, keep in mind that just because a stock is cheap, that doesn’t mean you should jump on it. Sometimes, it isn't merely undervalued. Rather, it is priced that way because it is underperforming. Consider its long-term forecast and only select ones that you’re confident will be turning a profit years down the road.

4. Dig into the records.

Deciding to invest in an individual stock is one of the most important decisions you’ll make regarding your financial future. To this end, it’s worth taking the time to dig into the financial records of any company you’re considering.

If it’s a public company, it will have both annual and quarterly reports available for public viewing and use. Not sure where to find these? Start by seeing if the company’s website features an Investor Relations page or something similar along those lines. If you still can’t find the reports, they should be available via the U.S. Securities and Exchange Commission, or SEC. A market analyst can also be invaluable in helping you understand the financial health of a particular company and other important specifics.

Even if you find that the company had a great last quarter, don’t stop there. Remember, what you’re looking for is a history of solid and repeatable growth. So take your search a few years back and make sure the pattern you’re seeing is one of improvement and profitability year over year. Pay close attention to revenue numbers and make sure the trend is moving upward, and check debt payments against peer companies to see if monies borrowed line up or if the company is taking on too much debt for its size.

At the end of the day, investing in individual stocks can be a great way to expand and diversify your portfolio. If you can manage to avoid the hype surrounding some options and take the time to really investigate and evaluate the soundness of others on your radar, you’ll be one step closer to making a sound financial decision that can benefit you and your family for years to come.