Buy Growth Stocks

Today, now that we've weeded down the market some by eliminated the stocks under a certain price, I wanted to move onto rule #2 which is buy growth stocks. A growth stock is a stock that has earnings potential which is greater than the average stock. Our goal is to find these companies. The question is how? When we are looking at stock market investing today, we've got to buy quality. When it's all said and done, and you remove the people trying to outright scam people, the big money on Wall Street knows that you've got to buy quality and you want to look for what they are looking for.

So, our first objective here is to look for high growth stocks. William O'Neil says that we should be looking for three things:

1. Each of the last three years' annual earnings per share have been up at least 25%
2. Earnings estimate for the next year is over 25%
3. Annual cash flow is 20% or more above the earnings per share

The best growth stocks are the ones that are your potential superstars. In the end, it's earnings that drive the market. Institutional investors flock to stocks that show great earnings. As they do that, their buying because of it's sheer size, drives the price of that stock up. Our goal is find it when they do, or show signs that they are buying.

The first concept of stock market investing that you need to grasp is supply and demand. The more buyers there are for a company's stock, the more that the seller can charge. It's a lot like the real estate market. The more people buying houses, the higher house prices go. We saw with the real estate bubble that prices go down when no one can buy.

Investing in the stock market is the same. Big money pays for quality and when it does, it pushes the price of a stock up. This is where you can make money. By focus on a high quality when you buy stocks, you are looking at the same criteria that they do. Look at the growth stock picks they make by reading the Investors Business Daily mutual fund section. The real key to growth stock investing is uncovering their buying through the reading of stock charts. Stock charts tip you off to when they are getting into a stock and it's an area that we will be studying here in more detail as we go along.