How to Choose Stocks

How to Choose Stocks

Everyone wants to see growth from their stocks. That is why they take their funds from the bank and start investing them. Many first-time investors remove their funds with a feeling of trepidation and anxiety. The stock market is a volatile storm where many drowned.

The first step is to learn how to buy a stock.  Many investors jump right in learning investment strategies and adopting techniques that worked for others, before learning the simple steps to buying a stock.  Without a good understanding of the rules of buying a stock, it becomes impossible to make the strategies work.

The strategies do work but only when the investor chooses the right stocks for their own portfolios.  The strategies do not tell investors what to buy and when to sell. They are only meant to tell investors how to manage their stocks. First, the investor must buy some stocks.

Step #1: Read the Wall Street Journal

The Wall Street Journal is not the only paper that can help investors. The business section of your local paper can often offer tips that will never make it into the Wall Street Journal.  However, The Journal can teach new investors the lingo, and the basics of the markets.  The more you read, the more familiar the markets become, and the easier it is to research stocks.

Step #2: Pick Industries

No one expects an investor to build a portfolio with a few stocks from mining, a couple from manufacturing, a drug developing company, a foreign natural resource harvester, and a marine biology firm.  This is foolish investing.  Instead, investors should focus on one or two industries and learn everything they can about that industry.

There are many places to research.  Sometimes a simple place like finance.yahoo.com or Morningstar.com can provide all the resources needed to find an industry you will not tire of.

Step #3: Decide How Much to Invest

This is one of the hardest parts of investing. Many people have a set amount to invest. They experience some success and hit pay load. Then the temptation sets in. If they had invested $10 000 instead of $1 000, their payoff would have been 10x higher. What if they had of invested $100 000?  This type of thinking is dangerous.

Never invest more than you can lose is a nice mantra, but in the real world, resisting temptation is much harder.  As the year’s past, some investors start counting up the intangible money they may have earned if they invested more. This leads to frustration instead of joy when a stock does well.

Eventually, they start investing more than they can afford to lose. Then, they lose it –

Step #4: Avoid the Crowd

Some new investors believe the best way to buy a stock is buy whatever is hot now. They skip through websites and financial papers until they find something that is hot. Unfortunately for them, they have not yet met the Bull or the Bear.

Buying hot stocks is only for people who can determine why that particular stock is hot at the moment. Buying on an impulse or gut feeling is just as dangerous.  By the time a stock is hot, the real investors have already bailed, having made their money, and are leaving before the crash.

These four steps will help a new investor buy a stock which should perform well, instead of buying a stock that bottoms out within a few weeks.

Today, many people want to know how to buy stocks to increase their net worth. When it comes to making your purchase, there are several options available today. In the old days, you had to call up your financial advisor or stockbroker and let them place the order for you.

They would then phone in your order to someone on the stock exchange, who would locate a stockholder of that company willing to sell those shares to you. That was then; this is now. Nowadays, you can almost always make the purchase yourself via the internet.

Very simply, today there are many websites that allow active trading for a minimum fee. Keep in mind, however, that for each transaction you pay a fee. Many an investor has lost a great deal of money active trading, by merely being forced to pay a fee for each transaction.

While the fees generally don’t seem like whole lot (1-2% of the total) they can add up in a hurry when you are making a lot of transactions; especially if your investments are losing money or barely breaking even. The best strategy is to only buy a stock when you are sure it’s a sound long term investment. This way, you don’t have to pay the fees associated with active trading, and you also have much less risk from the day to day wild swings of the market.

How can you be sure of its long-term worth? While there are certainly several ways to go about doing this, the essential skill you need to have is knowledge of how to read a financial statement of a company. Very simply, you need to determine how well a company has been doing over the past ten years.

This is probably the most important factor, because if a company has been running profitably for at least ten years (preferably more) they are a good bet to keep doing well. These are usually not the stocks getting all the hype; very simply, most investors like the fly by night companies that have the potential to spring up and make a million bucks overnight. unfortunately, you will most often lose more money with these companies than you will ever make, because of the uncertainty factor.

Of course, you can still go through a traditional stockbroker to make your purchase. Remember that they are paid by commission for each transaction they make.

Often, they will try to encourage you to buy a stock, even if the outlook isn’t particularly profitable, so they can pocket some money for the transaction. Never trust a broker for your financial future; you need to know how to do your own research and determine which stocks are the best pick.

The bottom line is there are several methods for how to buy stocks. You can either invest online or through a broker; but no matter which method you elect to pick, make sure that the company you are investing in has good profits for the foreseeable future.

Avoid active trading when buying stocks, as that can be a very risky proposition. Active trading is like gambling; very few active traders ever win long term investing in stocks this way. Do your research, find the stock that’s right for you, and only then should you worry about how to buy stocks.

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