Wednesday, July 21, 2010

The Ultimate Buying Stocks Guide

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I know by writing a post called the Ultimate Buying Stocks Guide that I'm already setting high expectations for the page. I hope that it lives up to them. I figure that if I am ever going to attract a readership then I'm going to have to put together some content that really, really adds value. I expect that this will be a long post and therefore, if you decide to read it, will no doubt cause you to think of things you can add to it. If that's the case and you can think of something that will improve my guide, feel free to add it in the comments below.

If you want to buy stock today, I strongly recommend that you handle everything. Gone are the days when we can expect our stockbroker, our banker or other financial adviser to look out for us and make sure that we succeed. There's too much pressure on everyone in the market to give anyone, especially the smaller investor, full time attention. Once the commission made, they have to generate another one and another. It's the nature of the game. Now, I'm not saying that there are not exceptions to the rule. My friend works with people's money and he does an awesome job, but for the most part, you are on your own. You should therefore look to be your own stock market investing adviser because that is in truth what will be happening. Most likely nothing will happen in your account until you call your broker and tell him or her you are not happy. You will then make a change.

If you don't want to be your own adviser then you should not be in individual stocks. You should be in mutual funds. Mutual funds have full time manager who are actively trying to outperform the market. At least they are managing the money and someone is looking after the money. Just buy the best one you can find. But, if you want to buy stock, you will have to learn that the buy and hold strategy that applies to mutual funds doesn't apply to individual stocks. You must turn them over. You must sell them and hopefully before they tank which all stocks eventually do.

Keep in mind that the reason that a stock's price goes up is because demand has increased. Demand increases when the big money on Wall Street decides to take a position in a stock. The whole time they are establishing that position, the overall trend of that stock will be up. However, once they need to exit and take a profit, the exact opposite happens. This is why you must sell stocks at some point. Because the demand evaporates and then the stock's price falls. This usually happens just right after you got in because you heard it was a great stock. If you think it's a coincidence, I beg to differ. You see when the big money needs to exit a stock position, they start advertising the stock, the Wall Street firms start recommending it and then the analysts start upgrading it. This advertising campaign brings in buyers to help the big money get out of the stock with a profit -- and you holding the bag.

You can help yourself avoid this by learning how to buy stocks the right way and I hope that you've learned the first rule I have brought to light above and that is that you don't buy stocks the media tells you to buy - ever. In fact, for the most part, I'd do the exact opposite of what the media tells you the vast majority of the time. You've got to learn to make your own decisions.

Once you've mastered that rule, the next step is that you have to decide what type of investor you are going to be. There are many different types of strategies you can follow developed by the masters of investing in the stock market. These are people like Benjamin Graham who followed a value investing approach, Philip Fisher who developed a growth stock strategy, Warren Buffett who is maybe the most famous investor of our time, Peter Lynch who used to manage the Magellan Fund, William O'Neil of CANSLIM fame, and Bill Miller. Review and study these masters and then do the next step - pick an investment strategy that suits your personality and then stick with it! Because the market offers so many choices, there are so many ways to make money. If you are interested in the market, you will be tempted by them all and of course part with your money. If you have the money, by all means feel free to use it. But realize that there are no shortcuts and that choosing a strategy and then putting all of your effort into mastering that strategy is the best course of action. If your an absolute beginner, then research the basics of the market first and then start researching strategies.

Your next course of action is implementing your investing strategy to make it market worthy. You'll do this by going through practice sessions with a stock market simulator like the one at investopedia.com or marketwatch.com. Develop your system of finding stocks to buy by setting up your tools. You will need some way to track the market's daily action like the Investor's Business Daily, a way to screen for stocks to put on your watch list like the Custom Stock Screener at investors.com or a software program like Worden's Telechart. You'll need to set up a way to manage your watch list and decide which stocks make it and which don't. You'll need a charting service either through the IBD or stockcharts.com. You'll also need a selling strategy to make sure that you exit a position before it collapses to lock in gains.

By practicing or using a stock simulator, you can fine tune the decisions you need to make on a daily basis. Write these steps down so that you follow them exactly the same down. Put them in the form of a checklist. Fine tune the check lists. Constantly improve them. Practice until you feel comfortable.

During the practice phase, start researching brokers. These days you buy stocks online, without the help of anyone. There are a number of online brokers like ETrade, TDAmeritrade, OptionsXpress, TradeKing are a few. These are going to change over time so I won't even try to list them all. Pick the broker that provides you with what you need as far as the tools you used during practice. If they have a stock simulator, use it before you fund the account. What you want to do is find the broker with the least fees and the best service. I look for two things. One, no maintenance fee and two, what I call the lowest round trip trade. For example, if trades cost $9.95, then you are going to pay two fees. Once when you buy in and once when you sell. That's $19.90 round trip. Get the round trip as low as you can. Don't fund your account with the full amount. Put a small amount of money in and make a few trades to see if the online broker meets your needs. Everybody is different, find one. Test a few if you have too. Check out all of the features they have to offer by checking out all of the options on the menus. Can you trade long, short, with options or on margin? Do you require it? Whatever you investing strategy requires make sure they have it. If they have a stock simulator that lets you practice using the tools, I strongly suggest you use it to get a feel for the real account.

You want to move from the practice phase to trading with real money as soon as possible. Using real money is the best teacher. Only by trading for real can you learn the art of trading stocks. Your quest for the best stocks to buy won't be easy and you will make mistakes. The important thing is to make them. Learn from them and adjust accordingly. Many times, the strategy is sound. It's pur implementation that is poor. Analyze where you went wrong and work to improve. It might cost you some losses, but it's well worth it down the road. Look at it like the cost of doing business. It's no different than letting your broker let half your money disappear by never telling you to sell like happened to some of my family members. You'll probably lose less if you work at it and study the markets. Don't let anybody fool you, you can and will lose money, there are no guarantees. It's part of the learning curve.

Once you've settled into who you are going to trade with, fund your account as large as possible. The market is full of investors who are looking for good stocks to buy. The ones with sufficient capital typically do better. You can and should start even if you have a small amount to invest. You can invest with as little as $500. Plan on adding to your account as you get extra money. The ideal method would be to have over $100,000 to start with but for a lot of people this is not possible. What I suggest is that if you are starting small in the market, start with money you can afford to lose and consider it gambling. At first, it probably will feel like it. You put your money on a stock and wait for the dice to roll (the market open).

Learning how to buy stock takes two things. A commitment to study and a brokerage account. Start investing now. Make a few trades and then do a post review of all of your buys and sells. Study what you did write and what you did wrong. Make adjustments. Don't make the same mistakes and constantly improve your daily stock investing routine.

Good luck and keep me posted on your progress.

Ty

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1 comments so far

Thank you!
I'm a newbe on this investing in stocks thing! I don't have a huge reservoir of money to gamble with, but this has gotten me a bit excited about my possibilities! Though I'm kind of perplexed with the difference in investing with individual stocks or a mutual fund.
I guess it means more research for me!

Thanks again!


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