Investing is easy but investing successfully is tough. Statistics show
that the majority of retail investors, those who aren't investment
professionals, lose money every year. There could be a variety of
reasons why, but there is one that every investor with a career outside
of the investment market understands: they don't have time to research a
large amount of stocks and they don't have a research team to help with
that monumental task.
For that reason, investments made after
little research often result in losses. That's the bad news. The good
news is that, although the ideal way to purchase a stock is after a
large amount of research, an investor can cut down on the amount of
research by looking at these select items:
What They Do
Jim
Cramer, in his book "Real Money," advises investors to never purchase a
stock unless they have an exhaustive knowledge of how they make money.
What do they manufacture? What kind of service do they offer? In what
countries do they operate? What is their flagship product and how is it
selling? Are they known as the leader in their field? Think of this as a
first date. You probably wouldn't go on date with somebody if you had
no idea who they were. If you do, you're asking for trouble.
This
information is very easy to find. Using the search engine of your
choice, go to their company website and read about them. Then, as Cramer
advises, go to a family member and educate them on your potential
investment. If you can answer all of their questions, you know enough.
Price/Earnings Ratio
Imagine
for a moment you were in the market for somebody who could help you
with your investments. You interview two people. One person has a long
history of making people a lot of money. Your friends have seen a big
return from this person and you can't find any reason why you shouldn't
hand this guy your investment dollars. He tells you that for every
dollar he makes for you, he's going to keep 40 cents leaving you with 60
cents.
The other guy is just getting started in the business. He
has very little experience and, although he seems promising, he doesn't
have much of a track record of success. The advantage to this guy is
that he's cheaper. He only wants to keep 20 cents for every dollar he
makes you - but what if he doesn't make you as many dollars as the first
guy?
Five Chart Patterns you need to know…
If you understand
this example, you understand the P/E or price/earnings ratio. If you
notice that a company has a P/E of 20, this means that investors are
willing to pay $20 for every $1 per earnings. That might seem expensive
but not if the company is growing fast.
The P/E can be found by
comparing the current market price to the cumulative earnings of the
last 4 quarters. Compare this number to other companies similar to the
one you're researching. If your company has a higher P/E than other
similar companies, there had better be a reason. If it has a lower P/E
but is growing fast, that's an investment worth watching.
Beta
Beta
seems like something difficult to understand, but it's not. In fact,
and can be found on the same page as the P/E Ratio on a major stock data
provider such as Yahoo or Google. Beta measures volatility or how moody
your company's stock has acted over the last 5 years. Think of the
S&P 500 as the pillar of mental stability. If your company drops or
rises in value more than the S&P over a five-year period, it has a
higher beta. With beta, anything higher than 1 is high beta (meaning
higher risk) and anything lower than 1 is low beta (lower risk).
You
have to watch high beta stocks closely because, although they have the
potential to make you a lot of money, they also have the potential to
take your money. A lower beta means that a stock doesn't react to the
S&P 500 movements as much as others. This is known as a defensive
stock because your money is much safer. You won't make as much in a
short amount of time, but you also don't have to watch it every day.
Dividend
If
you don't have time watch the market every day and you want your stocks
to make money without that kind of attention, look for dividends.
Dividends are like interest in a savings account. You get paid
regardless of the stock price. Dividends of 6% or more are not unheard
of in high quality stocks. Before purchasing a stock, look for the
dividend rate. If you simply want to park money in the market, invest in
stocks with a high dividend.
The Chart
Learning to read a
chart is a skill that takes time, but basic chart reading takes very
little skill. As famed investor Dennis Gartman says all the time on
CNBC, if an investment's chart starts at the lower left and ends at the
upper right, that's a good thing. If the chart is heading down, stay
away and don't try to figure out why. There are thousands of stocks to
choose from without picking one that is losing money. If you really
believe in this stock, put it on your watch list and come back to it at a
later time. There are many people who believe in investing in stocks
that have scary looking charts, but they have research time and
resources that you probably don't.
The Bottom Line
Nothing
takes the place of exhaustive research. However, one key way to protect
your assets is to invest for the longer term by taking advantage of
dividends and finding stocks with a proven record of success. Unless you
have the time, risky and aggressive trading strategies should be
avoided or minimized.
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