People buy stocks so they can sell them and make a profit when the price goes up. The problem is that many stocks go down instead. To increase your chances of buying stocks that are likely to go up, you need a strategy. Some strategies are pretty safe, but they don't let you make much money. Others are risky and you make a lot of money when they work, but when they don't, you may lose most of your investment. The key to buying stocks is to choose a strategy with a level of risk that you can accept, and one you can carry out.
Investors want to tailor their stock buying strategy to the amount of risk they are prepared to assume. The "buy-and-hold" strategy, which involves buying quality stocks and holding them for long periods, assumes stock prices will rise over the long term. According to InvestorGuide.com, records from the last 50 years support this assumption.
A more risky strategy is to try to identify companies that will grow rapidly. When they grow, they will earn more money and their stock price will go up. If a company has been growing rapidly for a few years and has lots of room for more growth, it may be a good bet.
Investors who use a low-risk strategy such as "buy and hold" still want to see a return on their investment. Many opt for steady investment growth by choosing quality companies that have a strong record of profit and revenue growth. Quality companies have high profits, low share price, effective management, few competitors and strong finances. You can also look at the value of companies by checking their price to earnings, or P/E ratio, where price is their stock price. A low stock price with high earnings per share is a good value.
Older investors tend to prefer investments that generate income over those that grow steadily. An income-based strategy looks for stocks with high dividends. Such stocks are resistant to downturns because their dividends support the stock value. The upside is usually limited as well, but investors receive a steady income.
An asset-allocation strategy can also generate income and is not limited to dividend stocks. In this strategy, you divide the stocks you buy into categories such as stable, low-risk, risky and speculative. You define a risk profile by deciding what percentage of your total investments will go into each category. When a category does well, you have to sell some of its stock to keep the percentages steady. When a category loses money, you may have to sell some stock in the other categories to maintain the percentages. In this way, you lock in profits from the categories that do best, and you can generate income from the sales.
The investment time frame you are looking at influences the strategy that is appropriate for your situation. If you are looking at long-term investing that expects results 20 years down the road, buy-and-hold or growth strategies are likely to deliver reasonable returns. Strategies such as market timing, where you try to anticipate short-term market moves, or "contrarian," where you buy market dips and sell peaks, may deliver results over the short term.
Before you buy stocks, it makes sense to follow them to get a feel for their movements. You can create portfolios of stocks and get all of their relevant information for free in the financial sections of websites such as Yahoo and Google. Yahoo will let you create a stock portfolio by clicking the "My Y!" link at the top of right of the page and signing in or creating an account. For Google, you also have to sign in or create an account, and you'll find a "Create a Portfolio" section at the right, near the middle of the page.
Bert Markgraf is a freelance writer with a strong science and engineering background. He started writing technical papers while working as an engineer in the 1980s. More recently, after starting his own business in IT, he helped organize an online community for which he wrote and edited articles as managing editor, business and economics. He holds a Bachelor of Science degree from McGill University.