Buying stocks of publicly traded companies in the stock market today is one of the best ways for you to create your financial empire from scratch. That said, the vast majority of people lost a ton of money in the last bear market. Every time I think of family members who lost nearly half of their portfolio due to the market's most recent collapse, I ask myself -- why? Why is it that Wall Street preaches this buy and hold mentality to the masses when the logical thing would seem to be to sell when you have a gain?
The answer I think is simple. Wall Street profits whether you win or lose. They do this through fee income. They also profit when you lose because they are most likely trading against you. While I don't think it happens exactly this way, I picture people with tons of money sitting in a room and asking themselves one question, how can we manipulate the market so we can number one protect our capital and number two, make a killing.
I think the first way they do this is by telling us to do one thing - buy and hold - while doing the exact opposite. Buying and selling to lock in gains. To me this is lesson one. If you are going to buy stocks on your own, you must learn how and when to sell your positions. You must learn to lock in stock market investing gains instead of letting them slip away.
But I guess that I am getting ahead of myself. That's just the first thing I wanted to impress upon you that you should learn to do what Wall Street does and not way they say. Be leery of the media and the potential manipulation of the stock market by news and press releases. Believe first and foremost in your strategy, your research and your plan. Work to be a master of your investment philosophy - whatever that might be.
I guess that my second piece of advice would be to only buy stock long. This means to actually purchase the underlying stock in the hopes that it will go up. Don't be swayed by the allure of the fancy strategy. By this I mean, shorting stocks, doing options. Both entail a lot of risk and you could lose all of your money. In addition, avoid investing in penny stocks. Only invest in quality stocks that mutual fund managers would purchase for their fund. Their demand for the stock is what makes a stock's price go up.
Before we get into specific strategy, I want to spend a minute or two talking about the basic law of the free market system and that is the law of supply and demand. The law of supply and demand is what determines the price of a product. The more demand for a stock (product), the higher a price it will trade for. The lower the demand for a stock, the lower the price must go to attract buyers.
The law of supply and demand is crucial for you to understand and I think at the heart of any investing strategy you might employ. This is because it explains first and foremost, what makes a stock go up in price -- which is what you want to happen with any stock you own.
I'm not going to go into the details of supply and demand but if you want to read more about it, here's a good article on it. For now, I hope you can see that the more people want a stock, the more people can charge for it. And the less people who want it, the less people can charge for it.
What you need to know primarily is the more demand for a stock, the higher it's price. But knowing that, the next question is where does this demand come from. From watching the evening news, they always talk about "investors" like it's all of us in our homes. Investors got nervous today about the Greek debt crisis and so on. But the fact is that we, the little guys, have very little impact on the overall price of a stock.
The real players in the market, the ones who create the kind of demand that makes a stock price rise, are the mutual fund managers and the institutional money. They have millions of dollars at their disposal. When they put it to work in an individual stock, the price goes up. This is when you want to get in and you need to figure out how to buy stocks when they do so you can go along for the ride.
But how do you find stocks to buy that are being bought by the big money? You do that by analyzing the price and volume action of the stock on a stock chart. More on that in a bit.
Once you understand that the law of supply and demand, it's time to get more specific. Before you even begin to buy stocks online, the very first thing that you'll need to do is adopt an investing strategy. When it comes to investing strategy, there are two basic schools of thought. Growth and value. While there are other types of strategies or nuances to the these two, you'll need to decide on what type of investor you will be.
The value investor thinks the best stocks to buy are ones that are basically "on sale". They are good companies but for some reason their stock is undervalued either do to the economy or some other cyclical variation that has temporarily depressed the stock's price. One of the best known value investors is Warren Buffett. He developed his strategy from Benjamin Graham who wrote the book called the Intelligent Investor.
On the other side of the spectrum are the growth investors. They believe that new, smaller companies with new products with explosive growth potential are good stocks to buy. One of the best growth investors is William O'Neil who wrote How to Make Money in Stocks and developed the CANSLIM theory. As a side note, he's suggests you don't buy penny stocks for the reasons above as well.
What's been proven over time is that you can make money with either strategy. So, what strategy you pick isn't as important as picking a strategy. Determine which type of investor you want to be and be it. Don't be wishy washy and flip flop from idea to idea. Your first objective should be to decide on a strategy and then work on mastering it.
I said all that above because when you first learn how to buy stock, it's easy to be swayed by all the marketing ploys out there. Everybody is selling an investing newsletter, or website subscription. It's easy to get off track by that. It's also easy to lose your way if you watch the news. Grounding yourself into a specific strategy will help you stay the course.
For me, here on this site. The strategy of choice is CANSLIM.
So with that said, let's get into what I'm going to set out to do here and that's master my chosen strategy by doing a case study that follows the specific steps that I take on a daily basis. The goal is to set up a daily investing routine that's very specific and effective.
Having studied O'Neil's books and the his newspaper the Investor's Business Daily, I've broken down his strategy into six steps I'm going to work on. They are:
- Determining the general market's direction before I buy stock online.
- Set up a stock screening system that identifies the best potential stocks.
- Set up and managing a watch list of stocks I want to keep tabs on.
- Using a stock's chart to identify specific chart patterns and buy points.
- Follow sound selling rules to lock in gains and limit losses.
- Reviewing all stock trades to fix mistakes and areas I need to improve.
Before I start buying stocks online, I want to work my way through these steps by using a stock simulator. I'll be using the one at investopedia.com for that. Using a simulator is one of the best way to learn how to buy stocks for beginners. While it doesn't recreate the real atmosphere and emotion of investing with real money, it does allow me to work on setting up our system. Once I've developed my system, I'm going to keep track of my winning and losing trades and set a minimum goal of being able to pick a winning stock once in every three tries.
Once I have that kind of success rate and have broken down my daily decision making, then I will start to invest with real money. Join me if you want to and let's get to work becoming a master of our strategy.
As I complete this case study, I will put a link to each post here:
Buy Stocks: Where I Started
Buy Stock: Follow The Leaders
How To Buy Stocks
Finding CANSLIM Stocks To Buy
Buy Stocks Online: Start Looking At Charts
Best Stocks To Buy
Good Stocks To Buy
How To Buy Stock
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