For many investors, there comes a point where they decide to go into the stock market. It’s almost like a coming of age, where the person decides to take more control of where their money goes. A bad experience might lead some to go back to managed investments while others find success and keep going with investing on their own.
By researching stocks on your own, you benefit in a number of ways. Namely, gain a better understanding of corporations and the economy at large and you may start to gain interest in other areas of investing, like bonds and real estate. While there are a number of resources out there that investors can make use of, like Google Finance, it can be tough to figure out just how you should start picking stocks.
So that’s what we’ll be looking at with this post.
Picking the Right Strategy
When it comes to buying stocks, there are a few questions you have to ask yourself before getting started. First and foremost among those questions is how long you want to invest for. Do you want to buy stocks for life? This is an admirable strategy to follow, but not one that many people have the patience for. Day traders are the opposite. They buy stocks early in the day in hopes of making some gains, and then sell by the time the markets close later that same day.
For now, let’s focus on value-oriented investing, which is hailed by many famous money managers, including Warren Buffet. This type of investing involves finding companies that have deflated prices that may be undervalued by the market. Ratios are used by investors to compare their stocks against others in the same sector. One is the Price-to-Earnings (P/E), which is a ratio of a company’s current share price compared to its per-share earnings. Typically, a low P/E may mean that the stock is undervalued relative to its peers, but it could also mean a negativefactor is the cause, like a pending lawsuit.
Picking stocks is complicated, which is why some investors stick to established strategies like “Dogs of the Dow.” This approach basically has an investor choose the 10 cheapest stocks with the highest dividend from the 30 in the Dow Jones Industrial Average. These stocks have the highest dividend payouts and lowest prices. If you don’t know, dividends are company profits that are paid out to shareholders. Under this strategy, the portfolio is reviewed each year and redesigned using the newest lowest prices. While this strategy has the potential to bring a positive return, past success doesn’t guarantee future results.
When looking to get into the stock market, you want to keep in mind that the stock market is susceptible to feelings of uncertainty about the future, and that can cause prices to fluctuate.
Likewise, there isn’t a proven method for beating major market indexes. Something may work until it doesn’t, and you might chalk it up to bad luck, but many people share the same experience.
In order to narrow down the list of stocks you’re interested in buying, you may want to consider using a screener. You may have read somewhere that you should buy small companies that have a chance of high returns on equity percentages. If you don’t know what that means, then you can turn to online resources like Yahoo Finance and MSN Money Central, which have screener services. These allow you to put in a number of criteria, which can be factors like company size, ratios, cash balances, and earnings growth, and will return a list of stocks that fit your criteria. From there, you can pick exactly what you like.
There is also a strategy of common sense, which is when you take a close look at trends and try to find the right company — one that’s capitalizing on that trend — and invest in it before it gets too big. Think about companies selling healthy and organic foods before the idea became as popular as it is today. You want to take a position before positive news hits, which is easier said than done. Once everyone else starts piling in, typically that’s when it’s time to sell.
There’s also the somewhat unorthodox strategy of buying stocks in places where you spend the most money. It isn’t one that many people think about, but it’s one that makes sense when you think about it. This way, you aren’t trying to time the market, nor are you buying high and selling the minute the price dips. A word of warning with this method, however: You have to be careful of certain sectors, like retail, which tend to be more vulnerable during tough economic times than others.
You also want to read up on what others investors have done in the past. This can help you avoid making mistakes like holding a stock for too long, not knowing when to sell a loser, and getting emotional over price swings.
Resources You Can Use
A lot of great resources can help you get started, like TradingMarkets, which has contributors who have a wide range of knowledge and experience who often work in finance. The news section updates often with new stories and there is a section that syndicates a variety of financial blogs.
There is also Seeking Alpha, which focuses more on opinions from investors and finance professionals than news. The site has many notable features that include:
- Searching by ticker symbol, making companies easier to find
- Linking to specific blog articles on specific areas of the market like Biotech, media, gold, and foreign markets
- A listing of conference call transcripts, which makes it easier to figure out what’s happening behind the scenes of a company.
This site is more of an aggregator of opinions, but there are plenty of good individual blogs such as:
- Ticker Sense, which is run by the money management firm Birinyi Associates. This site combines stock discussion with market analysis and trends. There is also a subscription newsletter that provides stock picks.
- D Trading, which is a blog that serves swing traders and short-term stock pickers. The owner, Edgar Alcidi, is a technical trader who provides charting, commentary, and addition resources for his readers.
For the people who are resourceful and do their research, getting into the stock market has the potential to be profitable. You want to read about what others have experienced and find the right strategy that fits your needs. You also want to review your strategy and risk tolerance every so often. It helps to make a budget where you keep money for stock market investing separate from retirement accounts and other savings accounts that you need for the future.
If you have any questions about the stock market and investing strategies, be sure to contact me today and let me know how I can help you!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal. No strategy assures success or protects against loss. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. The prices of small companies are generally more volatile than larger well established companies. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. Edgar Alcidi is not affiliated with LPL Financial.