How to Decide What Stocks to Buy

Kids in a candy store have the same problem that investors have picking stocks. Sometimes, everything looks good and you can’t decide what to buy. With limited funds, though, it’s important to make some good decisions around your investments. Although you might have to pass on some compelling opportunities, by limiting your investments to a few key companies, you’ll be able to focus your attention on results and better reach your financial dreams.

Step 1

Review your goals. The primary deciding factor on your investment strategy should be the time your have to reach your investment goals and the amount of money you’re willing, or able, to dedicate to those goals. If you have trouble saving money, you may need to take more risk or reduce your goals. If you can afford to save more, you’ll be able to focus on more conservative stocks. Write out your goals, the time you have to reach each one and the amount needed to achieve them. Use online calculators to help with big goals, such as retirement or education expenses.

Step 2

List stock types that will reach your goals. Large company stocks work well with goals over five years and, historically, are more conservative investments than small company or international stocks. Prudent investors use a collection of different types of investments, focusing on more conservative stock investments for shorter-term goals and sprinkling in more aggressive stocks for long-range plans.

Step 3

Search for good stocks by listing companies that you know and admire. The world’s richest investor, Warren Buffett, only buys stock in companies he understands. By focusing on those firms you know, you’ll make better decisions to buy or sell as market conditions change. You’re not buying stocks yet, though. At this point, list as many companies as possible to give yourself a watch list you’ll evaluate.

Step 4

Research stocks on your list. Use stock screeners at finance sites, such as Yahoo! Finance or Wall Street Journal Online, to decide which companies to buy. Explore factors such as company revenues and profitability to find stocks that have increasing sales and earnings. Visit each company’s website and click on the investor relations section to review annual reports and get a feel for product development and management thoughts. Read outside news reports of management changes and reviews on the company. This should help you eliminate many companies on your list and focus on a few potential winners.

Step 5

Choose stocks from your research list to buy. Review recent trading prices at web charting sites such as MarketWatch BigCharts or E*Trade ClearStation. If you see large spikes in trading volume or prices, hit the net to find recent company news. It may turn you that decide against buying this stock right now.

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