How To Choose Stocks

Posted by Nick Niesen on November 8th, 2010

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 years 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? at the moment. 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 are able to 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.