How to Choose Stocks

When you want to see more growth from your funds, it is time to take them out of the bank, and invest in stocks. When you know nothing about investing, it is a bit scary because you fear losing all your money. Learn first, how to understand how stocks work, and how to choose the correct ones for you.

Steps

  1. Read as much as you can about publicly traded companies, the stock market, accounting, finance, financial statements, etc. There are tons of free websites devoted to these topics.
  2. Read the Wall Street Journal, and the Business section of your local paper. The more you read, the more you’ll learn about the market and what to look for in a company.
  3. Start with industries with which you are familiar. No matter if you are a student, a teacher, whatever, you are familiar with at least some publicly traded companies.
  4. Think of products you like or companies that provide services you think are good or popular.
  5. Look up the company or parent company that makes the product or service you like by going to finance.yahoo.com or http://moneycentral.msn.com/home.asp, for example.
  6. Look at the company’s official website, especially everything in the Investor Relations section
  7. Look at the company’s financial statements. It takes lots of time to learn how to analyze these properly, but you should definitely have looked at them before investing in a company.
  8. Become familiar with the free Morningstar.com website. Especially look at the “5-Yr Restated” financial page–this page can identify the consistency of revenue growth, earnings growth, dividend record, stable number of shares, free cash flow, and the balance sheet.
  9. Decide how much money you are willing to risk. Imagine you were to lose all the money you invested, how much would you put in?
  10. Enter an order for a certain number of shares after you have followed the stock for a couple weeks to see where it is.
  11. Learn how to identify stocks with criteria that may indicate potential for future price appreciation.
  12. Determine a method of knowing when to be buying a stock and when to avoid adding new money to your investments.
  13. Learn technical analysis tools like candlestick charting, EMA, MACD, etc. to better time your entries and exits.
  14. Read Benjamin Graham and learn about value investing.
    • Learn what the “margin of safety” means. Warren Buffet learned this concept from Benjamin Graham and Warren said that this is the most important three words ever written about Real Estate. The Margin of Safety is buying a stock when the price of the company (value of all the shares) falls below the price of its assets (cash, land, buildings, equipment, stocks, bonds). A key-ratio called “Price-to-book” is the stock/assets and when it is below 1, there is a margin-of-safety.
  15. When you have read Graham, read all you can about Warren Buffett’s strategies. Buffett studied under Graham and got very rich by improving on Graham’s approach. The book “Buffetology” by Mary Buffett is a good start.
  16. Think logically about the stocks that you buy. Consider the fundamental profit-producing factors of the company; a stock that is cheap could be undervalued, or it could be nearly worthless and overvalued by some betting on a miracle and some hoping to sell to those people before the company collapses meaning that it has more going down than going up to do. Think also about trends and decide which is the best. For instance, if you know that a mass group of immigrants are about to come to the United States it is logical for you to think that they would talk to their relatives, it would make sense to get stock in the company that provides international telephone service.

Tips

  • Be careful about buying the “hottest stock”. It may indeed be a good buy but do your own homework to determine whether it meets your own criteria.
  • Read “One Up on Wall Street” by Peter Lynch. You will not regret it.
  • Do not buy a stock without seriously thinking about it first. Imagine if it fell 10% the next day, would you think you had made a bad investment or would you still believe in it? If you still believe in it, that is just an opportunity to buy more at better prices.
  • Expect price fluctuations. If you plan to buy 100 shares in a company, for example, do not buy it all at once. Instead, buy it in increments of two or three. For instance, you may buy 30 shares now, and enter order to buy another 30 shares when the price drops 10%, and the remaining 40 shares when the price drops 20%. If the price never drops to the level of your subsequent order, fret not, as there will always be other opportunities available.
    • Benjamin Graham did a study of 100 years and the stock market crashed 19 times in 100 years so every 5.3 years the stock market crashes 40% or more and every 2 years there is a minor crash where the stock market crashes at least 20%. Warren Buffet knows the companies that he likes and during these crashes he invests most of his money. When the stock market is not crashing, Warren Buffet is hoarding cash.
  • Warren Buffet and friends would get together every couple of years and ask the following question, “If you were to go to a deserted island and you had to invest all your money in one stock for 10 years, what stock would it be?” Warren Buffet said that this helps them to focus on long-term buying of a stock rather than the short gain that requires a quick exit.

Warnings

  • Do not impulse buy stocks. Make sure you know what you’re getting into.
  • Don’t place orders overnight. The stock might rise and open higher and you’ll spend more money than you intended to.
  • Don’t sell when a stock falls unless you’re sure it’s only going to drop further. Panic selling is a top reason people don’t come out ahead.
Tags: , ,

Related posts

This entry was posted on Thursday, December 8th, 2011 at 10:27 pm and is filed under Finance. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.