Investing in the Stock Market: How and Where to get Started
In the world we live in today there is no shortage of access to
investment information. This in itself however, can be an
enormous problem. Asking questions about how to invest, where to
invest, and what to look for, can bring you many answers from
lots of different sources. The trouble is diving through all the
clutter to find relevant information to suit your needs.
So when looking to invest in the stock market, where should you
start?
First things first, invest in what you know. If you are trying
to evaluate a company, make sure you know how it works. The
great Warren Buffett has often been criticized for not investing
in technology during the dot-com boom. His answer was simple. If
you don't know the business model, what the company does on a
day to day basis, or how it generates revenue now, and in the
future, then stay away from it. It is because of this that he
has earned billions of dollars year after year for himself and
his investors.
Once you know the types of companies to look for, you'll need
ideas. Message boards, newsletters, financial news shows, and
stock screeners are all good places to find ideas. Stock
screeners are especially useful, because in addition to finding
ideas, you can narrow the search down as you go to fit your
qualifications. I've personally had good luck using the screener
at http://finance.yahoo.com.
So you've found some companies worth looking into, what next?
1. Insider trading -- This is anyone who is considered to have
an inside knowledge of the company, and also has money invested
in company stock. This could be someone who owns 10% or more of
the company, a director, CEO, CFO, etc. Watching when the
insiders buy and sell stock, and at the prices they do it, can
be very useful in predicting a stocks future. You don't want to
buy a large stake in Company X when all the people running it
are getting out. Therefore it's always a good idea to watch what
the "smart money" is doing.
2. P/E ratio -- The price to earnings ratio can also be a useful
tool in evaluating a company. The P/E ratio will tell you if the
company is relatively undervalued, or overvalued. A company that
is undervalued should have a P/E ratio that is lower than other
stocks in their sector. This is a great value to plug into a
stock screener to find profitable companies.
Note: P/E can be manipulated (think Enron). Also P/E ratios vary
wildly depending on the sector you are looking in. Technology
stocks could have an average P/E ratio of 60, while oil
companies could have an average P/E ratio of 10. Whenever I
evaluate a stock, I don't look at the P/E against all other
companies, but I look at it against their competitors in the
same sector.
3. Technical analysis and charts -- This is another tool that
can help you see where a company has been, where the company
stands now, and where it's headed in the future. It shows the
company in a graphical form where you can see the stocks
activity and volume over a period of time. You can find many
tutorials on the internet about this, and you can even get a
free DVD that shows you the basics from
http://www.technitrader.com.
4. Management team -- Some people just look at earnings, charts,
and other technical ways of evaluating a company. This isn't
always a bad thing but to really know about a company, you
should know the management. You should know what other companies
they have been involved with in the past, and how they did when
they were there. You should also know where they plan to take
the company you're evaluating, and in what length of time they
have allocated to get there. It's a bit like evaluating a sports
team. You wouldn't pick a championship team without looking at
the coaching staff.
These are a few of the ways to help find companies to invest in.
Like with anything though, due your homework, write out your
goals, and when in doubt, ask for advice from someone who has
already accomplished what you are trying to do. Knowledge is the
key to being successful at just about anything.