Anybody who has ever tried to enter the stock market knows it can make your head spin. There are just so many choices to make, and so much information to digest -- all of this with the real risk of losing your hard-earned money. No one knows the "secret formula" to picking stocks successfully. Traders use sophisticated mathematical models to try and predict where the market is going, but the truth is if you make good educated decisions, you, too, can pick winners.
Define your investing goal. How long do you plan to hold on to your stocks? What return are you expecting in that time frame? Are you willing to stick with your picks through the ups and downs of the market? All these questions influence the kind of stocks that you purchase. Smaller companies generally have more volatile stock, meaning you can see quick gains and quick losses. Larger companies tend to be steadier, and many pay dividends, which oftentimes provide the bulk of your earnings from that stock, as opposed to the change in market value.
Research the industry/sector. Before you start looking at individual stocks, always take a look at the bigger picture. If you'd like to buy shares from an air transportation company, for example, ask questions such as: How has this industry been performing in recent years? If many of the players have been struggling, find out why. Is this market cyclical? The whole economy goes through ups and downs, it's the market's way of enforcing the survival of the fittest, so how does this sector fair in a cyclical market? What external factors affect this sector's operation and profitability? Going back to the airline example, obviously fuel prices would have a huge, direct impact on its operation.
Look at competitors. This is just as important as looking at the industry as a whole. Identify what the competitors of your company of choice are doing differently, how they have performed recently, what products they are looking to release in the future, and so on. Research anything and everything that you believe will differentiate your stock of choice from its competitors.
Take an in-depth look at the company you choose. Get a sense for how successful its managing team is, what your personal experience with that particular company is and what it is doing to gain market share. When you are comfortable with all aspects of your decision, i.e., that the industry is headed toward positive times, that its competitors aren't taking away market share and profitability, and that your company is well run and poised to continue its success, you can rest assured you have a good chance of seeing nice returns.
Keep up your research once you purchase your stock. In the corporate world things happen quickly, and in a few months what was a promising looking company can start to look sour. That's why it's important to keep reading up on the industry, the competitors and the company stock you own. Do so consistently once you own the stock, and if you're no longer comfortable with all those aspects, it's time to rethink your investments.
Diversify your portfolio. Diversification is the name of the game, and it's important to be aware of your risks. If you had bought those airline stocks, in 2011 you'd be exposed to hikes in fuel prices. Any unexpected rise in prices would harm your investment. However, this same event would be an added boost for an oil company. So if you hold the stocks of a well-run oil company and a well-run airline in your portfolio, they will both grow together to mitigate some of each other's risks.
The stock market is a volatile place where money is made and lost quickly. There are no guarantees that you will make money by investing in stocks. Consult with a financial professional if you do not feel comfortable taking on the risk yourself.
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