The stock market is an intimidating beast for some people, but it does not have to be so. Picking a successful stock, though not a science, can be achieved if you know what to look for, and more importantly, what to watch out for. Below are some guidelines to follow on your quest for the perfect investment.
A stock represents ownership of a corporation. Depending on how many stocks you own of a particular company you will have little or great financial dependency on the fate of the stock value. There are two basic types of stocks; common and preferred. Common stocks are those that a corporation issues and by purchasing one or more, you have a slice of the company. The preferred stock is the second class of stock and is less risky, but often less profitable, than a common stock. Preferred stock holders get preferential treatment over common stockholders. For instance, if a company goes bankrupt and dividends are given out, the preferred holders receive their first. Usually the dividend is fixed, however, and there is less chance for a rapid increase in value for the investor.
Stocks also breakdown into two other categories; income and growth. Income stocks are those stocks that are used for the purpose of gaining supplementary finance on the part of the investor. These are the more volatile and changing stocks that produce rapid profit and loss. These stocks generally lack dividends. Growth stocks are those that serve as long term investments. These stocks do not experience rapid or sudden increases or decreases (with exception), and will, for the long run, produce profit. These stocks typically offer a dividend to investors.
Do not buy stock in a company that you are unfamiliar with. Do the research before you write the check. Buying stock in a company you interact with or use products from is advisable. If you are in the construction industry and you are going to Home Depot everyday to pick up supplies and you are happy with the quality and service it might be a good idea to invest in the company. If you love Coca-Cola, why not pick up some shares? Disney fan? Buy some stock in Mickey Mouse’s company. Choosing stocks that you are interested in will make the investment process much more enjoyable, and chances are the reasons you like a company are reasons that many pothers like, and thus, the company is a solid choice.
Make sure the company has a product of service that the public needs or wants. This is common sense, but it is very important. If the public does not need a service the company will not be a success, so do not invest in it. The company you invest in must be in good financial shape. Even if a company comes out with a new product, it does not guarantee success. Companies must have a firm financial condition to ensure success in the slow periods. A strong financial state gives the company the ability to reduce costs and to purchase other revenue-producing assets like another company in a different market. The ability to grow is dependant on one thing—cash; if the company has none, do not invest.
You need to avoid some of the following pitfalls. Do not buy a stock if it is going down and assume it will go back up. Sometimes this is a great way of making profit, but often there is a reason besides a slump in the market that causes a stock to descend the ranks. Do not buy a stock simply because the name brand is familiar. Do not buy stocks based on your neighbor’s hot tip—always do your own research. Do not be afraid to buy a stock after it has risen considerably. Like stocks that go down, there is often a reason behind a successful stock—stability, great fundamentals, and signs of future success. Lastly, decide before hand when you re going to sell your stock—whether it increases or decreases. Never kick yourself for selling too early, and always be mad at yourself for waiting until your stock plummets when you could have cut your losses at an earlier time. There is no room for emotions on the stock market, so do not waste your time wailing over lost money or money that could have been had.
