The unfortunate thing about investing in common stock is there are so darn many of them to choose from. However, using a few online tools and applying a skeptical mindset will help you narrow down your choices to stocks you feel comfortable buying. Knowledge is your best ally in choosing good stock investments. If you have experience in a certain industry, stocks in that industry are a good place to start your research. Then consider stocks of industries that perform better during periods when your industry is slow and stocks of synergistic industries. Working from a familiar base will help you form your judgments in reality.
Open an account at a reputable online brokerage firm that provides stock screening tools that narrow your search by industry, revenue growth and number of shares outstanding. Make use of research reports and the ability to call an investment specialist to ask questions.
Check the interactive trading charts of your selected stocks to determine where they are in their individual market cycles. These charts will show whether the stocks are trading at the high end of their trading ranges. Learn technical analysis of stock charts so you can better identify the stock's price appreciation potential.
Read the quarterly and annual reports published by companies you are considering. Question anything that seems too good to be true.
Narrow your list of potential stocks to the top few choices and check the charts again to make sure you buy in at a good price. Then move your money into your selected stock in stages over time so you don't dump all your cash into the stock at a price that is temporarily high but average your purchase price over several separate trades.
Ignore hot stock tips from friends and the online stock pumpers. If your friend has made a profit in a stock, it may be that the upside run of that stock has played out for the time being. The stock pumpers, who send you emails touting the riches to be had by buying a certain stock, are simply promoting that stock for a customer or to sell a position they own on their trading desks.
- Beware of advice given on the stock bulletin boards. Many of the denizens of those boards are pumping or bashing according to whether they own a position and want the stock price to rise, or want the stock to drop in price so they can buy in at a lower price. The only news you can trust is that issued by the company underlying the stock, and even that should be viewed with skeptical caution.
- Never borrow money to invest. Never invest money you cannot afford to lose. Never invest money that you will need in the foreseeable future. Securities markets fluctuate, sometimes illogically, and you can lose your entire investment. If you need to sell out your stock position to raise money, you may be forced to sell at a temporarily low price, so make sure to invest with money you can let sit for an extended period.
Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.