Stock Picking for Beginners

Generally, there are five basic methods that the investing public uses to identify and purchase the stocks they buy. This is not to imply that any particular investor employs more than one or two of these techniques (which can be either very good or very bad, depending on which end of the list you're talking about). Here's a quick examination of each process, beginning with the most ludicrous and progressing all the way to the most insightful.

5. Darts. This is the lowest, the least highly-regarded, and likely the most-used process down through the history of the stock market. How does it work? Well, avoiding the technical jargon as much as possible, you attach the stock page to a flat wall, and from ten paces away you throw a dart at it. Whatever stock name the dart hits is the stock that you buy. A less physically-perilous way to implement this method is to close your eyes and use your finger as the dart (disregarding the ten-pace distance, of course). You may get lucky with your pick; then again, you may not. It doesn't require much work, but it's not very highly recommended, either.

4. Hot Tips. Just a step above Dart-throwing, this method employs advice from someone (a non-professional 99.98 percent of the time) to buy a stock that can't miss and is a lock to skyrocket within the next 48 to 72 hours. The "someone" could be your best friend, your barber or hairstylist, your Uncle Lou or the person in the elevator with the nice coat. People have even been known have their "lucky child" utilize technique Number 5 above and go with the results. If your uncle has some involvement with the company in question and actually knows something, the tip may be worthy of further investigation. If not, you'll probably be better off sticking with the lucky kid.

3. Educated Tips. These come from investment or financial advisors, fund managers, and other professionals. It's likely that these experts have done a fair amount of homework, so their opinions may have some validity. But if you got their tip from the television, radio, financial magazine or internet, it's a sure bet that millions of other investors did as well. And although the expert's advice may be reasonable, what if he or she has a change of heart or mind about the recommended company? It's happened; you may be hanging onto a stock that your expert has long-since dumped. But as tips go, an educated one is generally better than your barber's.

2. Your Broker's Buy List. Full-service brokers have their own recommendations about what stocks you should buy. These choices often come from analysts working at the broker's head office who study companies and groups of companies, issuing 'buy' and 'sell' signals based on their findings. The brokerage firm collects these signals and puts them on a buy list, which is then sent out to the brokers. The list is usually divided into categories, such as stocks for aggressive investors, stocks for conservative investors, stocks that pay dividends, growth stocks, etc. Using your broker's buy list is a good way to build a suitable investment portfolio. You can take advantage of the firm's research while still being able to choose which "buys" most appeal to you.

1. Conducting Your Own Research. This is the highest and most-recommended form of stockpicking, and probably the least-used. Your choice of stock is based on your impression of the company issuing it, and your impression is born from the fact that you've studied the company up and down, inside and out – and you like it.

You're encouraged to learn all that you can about stocks and the companies behind them. Use all of the source material available to you; keep your eyes and ears open, as well. You can glean a lot of information just by watching the way a company does business, how they handle their customers and their employees. Look at their numbers, and become familiar with what the economy and the markets are doing. The more that you learn about investing in companies, the less you'll need to rely on the opinions or 'tips' of others. You'll also become better at evaluating their information, and you will be able to decide for yourself what stocks are best for you to buy.

blog comments powered by Disqus
Scottrade