7 Steps you shall do before buying a stock - chartedu Chartedu - Technical Analysis e-Learning 7 Steps you shall do before buying a stock - chartedu Buying stocks can be confusing for a beginner, so you may need a little guidance if you havent done it before. On the other hand, making money consistently from buying stock can be very difficult. Most mutual funds under perform the index, which means even professionals can find it challenging. So take everything you read with a grain of salt. Step 1. Do nothing until you know the kinds of stocks to buy and under what circumstances to sell. Go to the local library and search online to find books and other resources on stock investing. A few excellent books to start with include The Intelligent Investor by Benjamin Graham, Security Analysis by Benjamin Graham and David Dodd, and Common Stocks by Philip Fisher. Also see Invest in Stocks. The rule of thumb with stocks is to buy low and sell high. You want to buy a stock when its affordable and sell it when its costly. Say that you buy 100 shares of stock priced at $15 each. Thats a $1,500 investment. If, after two years, the stock price has risen to $20, your $1,500 investment has turned into a $2,000 investment, giving you a $500 profit. Say that you buy 100 shares of a stock priced at $50 each. Youve made a $5,000 investment. If, after two years, the stock price has fallen to $25, your $5,000 investment has turned into a $2,500 investment, giving you a loss of $2,500. Step 2. Dont get stock prices confused with the value of a company. The value of a company is its market capitalization, or market cap. Market cap is determined by multiplying the stock price of a company by the number of shares it has issued. If the stock price of any given company is $100, and the company has issued 500,000 shares, its market cap would be $50,000,000 Therefore, a company whose stock price is $7 can have a higher market cap than a company whose stock price is $30 — if the first company has five times as many shares issued as the second. The market cap is the overall value of a companys shares, not the value of the company itself. Investors make an educated guess about the value of a company; theres no established way to define it, because youre making a guess about what the company will do in the future. Step 3. Understand a few more basics about stocks. Being successful in the stock market depends on being able to find out what a companys future returns are. This is a guess, a wager. Stock prices are deeply affected by peoples opinions of how companies are performing, not always the intrinsic value of the stock. A stock price goes up when more people want to buy the stock than to sell it. A stock price goes down when more people want to sell the stock than to buy it. Therefore, the price of any given stock is a reflection of how well people think the company is performing, not necessarily a cut and dry formula for how well the company is actually performing. In this way, a company can have a strong stock price and a lot of shares and still be overvalued, because people think the company is worth more than it actually is. In the same way, a company can be undervalued even if it has a mediocre stock price and fewer shares, because people think the company is worth less than it actually is. Your goal in trading stocks — aside from buying low and selling high — is to find stocks that are undervalued and buy them and to find stocks that are overvalued and sell them. Stock prices are also affected by earnings reports, which companies release four times a year. If a company releases strong earnings reports, its stock is likely to go up. If a company releases lower-than-expected earnings reports, the stock price is likely to go down. Step 4. Put your finances in order. Pay off as much debt as you can and minimize the loans youre taking out. Ideally, all high interest rate loans should be completely paid off first, and the only loan, if any, you should have is mortgage on the home you live in. Build three to six months worth of expense in a separate savings account before you start buying stocks. Step 5. Consider how stocks fit into your overall financial plan, and whether you should buy individual stocks or mutual funds. See How to Decide Whether to Buy Stocks or Mutual Funds. Mutual funds are a collection of stocks bundled into a group. There might be 100 stocks in a mutual fund, for example. So if you invest in that particular mutual fund, you are investing your money in many different stocks, essentially. If the value of one company in the mutual fund goes up, its not likely to make much difference in the big picture. At the same time, if the value of one company in the mutual fund goes down, its not likely to have a serious effect on your overall investment. Buying individual stocks is riskier than buying mutual funds. At the same time, the reward is higher. If you buy individual stocks and the value of the stock tanks, youve lost a lot of your investment. If the value of the stock skyrockets, youve made much more money than you might have investing in a mutual fund. Step 6. Do your due diligence. Research the company thoroughly before buying stock in it. You are basically making a bet about how well you think a company is going to perform in the future. Start with online financial sites to get a quick idea of the business and key financial ratios. Look at the balance sheets and income statements for the past 10 years to see if they are sound. Companies with a high debt load and poor record of profitability may be quickly eliminated from further consideration. Read the recent annual and quarterly reports (SEC 10-Ks and 10-Qs). Explore the companys website, if one exists. Read analyst reports, if available. If still interested, you may wish to speak to the companys customers, competitors, and suppliers, then finally the companys executives themselves to get a better idea of the business. Step 7. Make a wish list. Ideally, these should be stocks of great companies that you intend to hold on to through thick and thin. Warren Buffett, one of the best investors today, said that if you cannot hold a stock for 10 years, you should not even consider holding it for 10 seconds. Set a target price to buy for each stock and stick with it. For example, suppose after doing your due diligence, you decide Minnesota Mining and Manufacturing (3M) is great stock to buy, but the price is selling a little too high right now at $95/share. You would like to buy at $80 or less. Taking a look at the price history, you see that the stock is selling at an all time high, and was trading around $80-90 last year, and as low as $45 two and a half years ago. So $80/share is quite reasonable a target. Why not make it a tad lower, say $75? The key to successful investing is to stick with your strategy over long period of time. So once you set your target, and the stock hits the target price, you buy, and continue buying as the stock goes lower. Cheers !
Posted on: Thu, 25 Sep 2014 04:48:39 +0000