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Archive for October, 2013

Amazing Stock Market Tips

Saturday, October 19th, 2013

Whether you are a beginner investor, or a seasoned trader, you can always gain more knowledge about the stock market. That phrase that everyone knows about, “buy low, sell high,” isn’t all there is to successful market trading. There is so much more that goes into being successful. Continue with these tips so that you can begin to learn how to be a profitable investor.

Ask yourself what brought this stock to your attention

Fortunes have been squandered by acting on whispered stock tips during a dinner party or recommendations from a stock broker. Possibly the biggest red flag for any stock investor are the words “buy this stock immediately.” It doesn’t matter if the source of the stock tip is the Oracle of Omaha himself (i.e. Warren Buffet), if you invest based solely on stock tips, you are not being an educated and diligent investor.

Understand the company and business model

If you don’t know how the company earns its profits, you are in no position to evaluate the future long-term performance of the business. If you think a company may be a good investment, but don’t yet understand the way it earns its money, do some research. You may find the company to be an excellent long-term investment, or you may determine that the stock is overvalued and speculative, and not worth your hard earned dollars.

Know the numbers

It is essential that stock investors be aware of the basic financial performance of a company they are investing in. Even pure technical investors, who analyze stock charts for historical patterns, should understand the historical P/E (Price-Earnings) ratio of stocks in the company’s sector, how the P/E can be offset by the valuation of the company’s growth, what the company is inherently worth (its liquidation value or book value), as well as its debt load, return on equity, and how much the company is earning per share. These numbers are confusing at first, but with diligent practice, reading a balance sheet becomes second nature, and can save you from risky and speculative investments.

Look to the company’s competitors

Often times, a company comes to your attention because it is part of a lucrative sector of the economy. Perhaps this company is an excellent investment, but on the other hand, maybe its main competitor has better long-term prospects, a faster growth rate, or a superior management team. We recommend looking to at least the other 2 top competitors in the industry and comparing apples to apples to determine the superior investment.

Determine what the company is worth to you

In order to invest in a company, you must determine what you are willing to pay for the shares of stock. Sometimes you will wait until the stock undergoes a market correction and purchase at a discount. Other times, you will find that the stock price is already discounted, and there is no better time to invest than the present. Keep in mind though, you cannot time the market. You can only determine a fair price for the company’s shares based on what you believe the long-term value to be.

Diversify

In a perfect world, your portfolio will be divided equally between sectors and regions represented by your individual stocks (i.e. stock investment diversification). By doing this, you will protect yourself should any kind of catastrophe take place within a specific sector or region. Diversification also requires you to have you money invested in multiple companies, rather than having all your eggs in one basket. At the same time, it is recommended that the individual investor should only own shares in as many companies as they are capable of actively tracking and monitoring. In this regard, buy and hold passive investing isn’t the greatest strategy if you are not keeping an eye on the stocks. The buy and hold mentality can only be successful if you are keeping an eye on the underlying company so that you will not be caught off guard by a falling share price without understanding the catalyst. To give you an idea of how many stocks should be in your portfolio, most individual investors are able to track 5-10 stocks in their individual portfolio.

Track your overall performance

In a diversified portfolio, it is important to understand that you will never pick all winners. Sometimes stock prices will fall, despite the company’s long-term prospects. The most important thing to track is your overall performance vs a market index such as the Dow Jones Industrial Average.

Know when to sell

Panic selling has cost many investors a great deal of money. Investment is a long-term commitment to your future financial goals and well being. In order to know a good time to sell stocks, you need to understand the tax implications of stock sales, as well as the potential reasons to sell a stock. Keep in mind that sometimes, when the facts change, you should sell a loser. This will result in tax savings, as well as making a conservative decision based on your initial investing strategy. In addition, sometimes you will determine to add to your position despite the stock’s meteoric rise, because its long-term prospects are that much better. Just stick to your plan and don’t let emotion get the best of you.

Researching as much as you can about every company you are interested in investing in can really improve your performance in the stock market. Stay as informed as you can and don’t rely on hearsay alone. Remembering this advice will help you turn the biggest profit possible from your investments.

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