How To Buy Stocks

Since it's Friday, I thought I would spend a little extra time talking about how to buy stocks. Weekends are a good time to reflect on the market, your trades and cleaning up or adding to your watch list. Learning how to buy stock is something anyone can do. But, the fact is that most never take the time to study the market long enough to gain the experience they need to succeed. If you think the media is going to tell you the best stocks to buy, you are going down a quick road to failure. The key to buying stocks is watching the market and identifying the leading stocks on a daily basis. Actual trading experience is also the best teacher.

Over the history of the market, many people have put in countless hours of study and developed investment strategies that are proven successful. Because of that, you don't need to reinvent the wheel. Pick a strategy that suits your personality and run with it. Learn it inside and out. Don't go from idea to idea looking for the next get rich quick investing idea. People get sucked in to options, forex and penny stocks all of the time. Can you make money using those vehicles. Absolutely. Is it likely? No. Stick to strategies that are proven from the masters of investing like Peter Lynch, Benjamin Graham, Warren Buffett and William O'Neil. Start studying their works and putting in place your own set of steps to take on a daily basis. That's what I am doing here. I've become a follower of O'Neil and his CANLSIM strategy. I've decided it's the only strategy I am going to follow. I've also decide that I'm going to set out to master it as best I can.

I've started to illustrate this process with a series of articles in my Buying Stocks - A Case Study. To get up to date on what I am doing, you might check out the most recent posts in this case study by checking out these articles.

Buy Stocks: Where I Started
Buy Stock: Follow The Leaders

How To Buy Stocks For Beginners

First, I recommend that you become a CANSLIM investor. Start by reading How to Make Money in Stocks by William O'Neil. He also has another book called The Successful Investor that I think actually breaks down the steps in a more clear fashion. Read and re-read these books. Next subscribe to the Investor's Business Daily. Also known as the IBD, this paper is the source for all of the data you need to be successful. As a subscriber, you'll also get access to investors.com which has several useful tools to help you succeed. This includes a very thorough help section. I've also called IBD many times asking questions and they have always been extremely helpful.

Next start studying, the market indexes on a daily basis. Commit to only investing when the market is in a confirmed uptrend. The Big Picture column tells you every day what the current outlook is. You don't even need to know how they figure that out. Today it's in a confirmed uptrend. That's really all you need to know. Can you develop your own system to determine market direction? Should you add all of these secondary indicators that detail market breadth or new highs to new lows? Well maybe, but as a beginner, don't worry about such complexities. Keep it simple.

When you look at the stock market each day, what you are really looking at are the market indexes. Indexes are a composite (or price average basically) of how the stocks in that group performed for the day. You want to focus on four indexes. They are:

1. S&P 500


2. Dow Jones Industrial Average


3. NASDAQ


4. New York Stock Exchange Composite

Finding this data is easy. You just go to investors.com and look at the home page. They are right at the top. They are also at the top of the front page of each days paper.

I like to look at it online because I can quickly look at the indexes chart by clicking the link. While the same data is available in the paper on the How's The Market page, I like to see it on my computer screen.

Each day, look at index and determine if the market index went up or down in price. Once you've done that, look at the volume for the day. The volume is the bar at the bottom of the chart. Was the volume higher or lower than the previous day?

Once you've identified these two pieces of information, you can tell what kind of day it was on the market. These are the four things that can happen on an index each day.

1. The market could close higher on higher volume. This indicates that the market is under accumulation and money is flowing into the market. If the market is in a confirmed uptrend, this is what you want to see and is a positive for the market. If the market is in a correction, this could be considered an attempted rally or also might be a follow-through day. If the market is under pressure, this is also a good thing. In any case, this action on an index is always a great thing for investors.


2. The market could close lower on higher volume. This indicates that the market is under distribution and money is flowing out of the market. If the market is in a confirmed uptrend, depending on the price decline (more than .2 percent) it will count as a distribution day. If the market index is in a correction, this just means more of a bad thing.


3. The market could close lower on lower volume. This is the kind of action you want to see on an index if it has to have a decline. It's neutral action in any outlook at the time.


4. The market could close higher on lower volume. This is more a stalling action that might indicate the big money has stopped putting money in the market and is more of a sign of weakness or stalling action. While not necessarily a bad thing as every market uptrend needs to rest somewhat, it might be a red flag if it continues.

So to summarize, first look at the current outlook. You are going to find one of three conditions:

1. Market in confirmed uptrend (time to invest)


2. Market uptrend under pressure (don't invest, consider selling)


3. Market in correction (sell your positions)

Figure out what kind of market you are in.

Next, identify what happened on each index for that specific day. Is the market under accumulation or distribution. Read the Big Picture column, watch the IBD TV market wrap but only after you have decided for yourself what happened. Then confirm it by using those tools.

Remember this rule, only invest when the market is in a confirmed uptrend. Keep it simple and in the beginning just go with what they say. Get fancy later.

It will be around this time that you'll get an email or see an ad that will say "How To Buy Penny Stocks" promising riches and quickly. There's nothing to see there. Move on and keep your focus on your strategy.

The first step in learning how to buy stocks is only investing when the market is in an uptrend.

The next thing you want to do is start identifying stocks that meet your criteria. As a CANSLIM investor, there are several screens you can choose from that will bring some of the best stocks to buy to your attention. If you focus on buying the leaders, you'll dramatically improve your results. The problem with the IBD is that their are so many ways to locate good stocks to buy that you'll probably feel overwhelmed.

You'll find:

• The IBD 100


• Your Weekly Review


• Stocks on the Move


• Stocks in the News


• IBD 200


• Timesaver Table


• New Highs


• New America


• Big Cap 20

Because there are so many screens, it's almost too much information. So, here is my suggestion. Pick one screen to build your watch list from. Maybe you will like the IBD 200. Maybe it will be the Weekly Review. It really doesn't matter. Pick one screen and keep it as your source of new ideas. I guess in an ideal world, you'd have the time to make note of all the stocks in each of the screens. But in the world I live in, I only have so much time.

I repeat, when you are just starting out, pick one screen and only focus on it. Keep it simple.

For me, I chose the Stocks on the Move screen. Almost every stock that goes on to make huge gains will show up on this list, probably more than once. I watch it daily and then add the best stocks to my watch list. These are stocks I might want to buy at some point. But I don't know yet. I have to check further.

Here's how I do it.

1. I review the Stocks on the Move list.


2. I write down the tickers for the stocks in bold. These are stocks that have an EPS rating and an RS rating of 80 or higher. EPS stands for Earnings Per Share and RS stands for relative strength. The higher the number the better quality the stock. Keep in mind though that stocks that have high ratings might not go up. Why? They might have already peaked. That's why you'll need to review them further.


3. Once I've done that I put the ticker symbols into a MyStocksList on investors.com. I look at the price and volume information. I eliminate all stocks that didn't have at least 100,000 in daily volume.


4. Next I look at the Smart Select Ratings. I eliminate all stocks that have a Composite Rating (IBD's special rating) of less than 80.


5. I eliminate all stocks that don't have A or B ratings for SMR, Acc/Dis and Group RS ratings. I don't include anything of B- or less.


6. After that, I look at the fundamentals. I eliminate all stocks that don't show increases of at least 25% in EPS and Sales changes across all of those options in my stocks list. I keep N/A stocks.


7. Finally, I check the remaining stocks and eliminate stocks with more than 100 million in float.

I then add these stocks to my watch list and will review them further.

Now before you move on to learn how to buy stocks online, I suggest that first, if you are new, that you go through an three to nine month practice session. I'm going to suggest that you simulate 100 trades before you invest your own money.

That's what I am doing right now to show you how it should be done. The correct way to practice is to go through the motions just like you would if you were using real money. This will help you get a handle on your daily stock market routine. Start to make checklist of each and every action that you take. Start streamlining your routine so that you do the same thing every day. Get it out of your head and put your checklist out where you can see them. Take the time to go through them each time. Eventually you learn them by heart. But at first, you'll discover some little step you forgot here or there. You'll decide you need to add this or subtract that step. In essence, you'll be refining your steps. When you get everything out of your head, eventually you won't think about the steps any more and you'll be able to focus on the big picture, help control your emotions when you finally invest real money and be more able to act on your experience than figure out if you are doing everything you need to do.

Many people at this step of how to buy and sell stocks will scoff at using a simulator to practice. They will tell you that it's not like the real thing. They will say that the simulator won't act like the real market and you won't act the same once you invest real money. And, they will be right. But professionals every day use simulators to make sure they are well suited to the task at hand. Pilots, use simulators and checklists to be sure that they can handle any situation they might encounter. You should too.

I suggest that when you start identifying stocks that show up on your screen, you do a simulated buy the next day of a $1,000 worth of the stock with the least amount of float. Float is the number of shares that actually trade. The lower the float, the more of a pronounced impact on the price when the big institutional money flows into it. This kind of action is what you are looking for.

You want to ride this kind of uptrend as high as it goes. But when you do these simulated buys, what you should be doing is also setting your stop losses and your profit target. Whatever the price of the stock is, multiply it buy .92 to get your stop price. This is an 8 percent decline and also multiply it by 1.20 and this will give you your price target.

Once you've simulated the buy, only trade at the beginning and end of the day. Don't make intraday decisions. You'll find that some of your stocks will decrease quickly or increase quickly because of the low float. They will be more volatile. For now though, only check your stuff at the end of the trading day. If it dropped 8% or more, sell it at the beginning of the next day. If it increases to 20% sell it the next day.

Your goal here is to do this daily until you know not only what steps you need to take but also how to buy stocks and sell stocks as well. You won't be holding them forever. Some stocks will go down immediately and you'll cash out and leave. Some you'll be in for a while. If the market turns into a correction, you'll exit all of your stocks. If the market uptrend comes under pressure, you'll not buy any new stocks. Do just like you would if it were real money. Start studying charts and looking for cup with handle patterns, flat bases and other patterns. Try and identify ideal buy points. Start watching the price and volume action and ask yourself if money is flowing into this stock or not. See the market index information above. It's the same for individual stocks. Keep an eye on three moving averages, the 10 day, the 50 day and the 200 day moving averages.

Do this for 100 simulated trades as quickly as you can but no more than one a day. Along the way keep a trade journal of each stock. Note the results. What was the percentage gain or loss. Your objective is to be right on 1 out of 3 of your "at bats" basically. Also, make note of why you sold the stock. Was it because the market turned. Maybe the stock didn't seem to act right. Was it because it closed lower on extremely high volume.

Be tight with your simulated money. Treat it like the real thing and make sure that you contain your losses.

If you were right one out of three times, you have graduated to the next version of simulation. You'll want to open a trading account with $1,000 bucks and treat it just like a simulator. Only this simulator is a real live trading account with real time data. Start repeating the process. Choose a broker that's as reliable as you can get with the lowest commission possible. You want your in and out fees, or roundtrip, to be as low as possible. For example, if you go with Scottrade at this time, their fees are $7 per trade. Your roundtrip will be $14.

Now though, you'll only want to own one stock at a time. You'll learn quickly that the real market does work differently. And so do your emotions. But keep in mind that to learn how to buy stocks without a broker is a learning process. One you can do if you put your mind to it and focus your study. As with your simulated trading, buying stocks for real, you'll have the same goals. At least one out of three. Once you've done that, start committing more money to your stock market investing. Well, I've talked a long time today.

Today, I didn't add any stocks to my watch list. I put a buy order in my simulator for NYSE:MSB Mesabi Trust.