How To Be A Successful Investor In Stocks

When people buy stock of a company, the biggest misconception they have is that they are investing in one of the various investment options available, while the fact is that they are becoming one of the co-owners of the company. This investment option seems so tempting that people often directly take it on without any analysis. However, it takes a lot of effort for professional analysts to carry out fundamental analysis of stocks. This analysis gives an insight into the past performance and future potential of the company.

However, being a successful investor is also not rocket science. It just needs a bit of stock analysis and patience to meet your long term financial goals. To meet your long term financial goals through stock investing, you need to buy the stock at right price, wait for the time for it to appreciate, and then sell it out at the optimum time. Moreover, it pays you dividends along the way. Now the question arises, how do you do that?

Identify the right company to invest in, which will get you enough payback to meet your long term financial goals. This requires a bit of homework. You need to conduct the fundamental analysis of the intended company. Fundamental analysis involves the study of the earnings and growth of the company, its drivers, past performance, and future outlook..

The stock price is market-determined. It rises and falls everyday according to the current market conditions or the daily fluctuations in the economic conditions. However, it is the fundamental health of the company which determines its long term financial prospects. It is not always necessary that companies which perform well financially, also prevail in the news. The job of an analyst involves identifying such companies and looking at the long term performance expectations. Though, this won't guarantee continuous growth or 100% profitability, but such stock analysis will decrease the risk involved.

If we look at the daily price chart of the stock, the trend may indicate a direction. But it is not always advisable to track it daily unless you are a day trader. Stock prices are largely driven by market sentiments, and investor perception. Hence, they do not reflect the true worth of a company's stock. Fundamental analysis helps deduce the intrinsic value or true worth of a company. Apart from that, one should always keep an eye on the business cycle and the impact of competition affecting the company.

To become a successful investor in stocks, one needs to avoid committing some mistakes. One should avoid enthusiasm and not just keep buying the stock blindly. It is always better to first consolidate the position of your stocks before expanding or venturing into other sectors or stocks. Locking your gains will make sure that you are at a lesser risk. Sector analysis is a better way to filter out your trading preference and increase your earning prospects.

A stock's price showing an upward trend on a particular day doesn't mean that the stock will do well in long term too. This is the time, when you need to know the truth through fundamental analysis of the stock.

Stocks - Understanding the Risks

"Rule number one is don't lose your money. Rule number two is don't forget rule number one". (Warren Buffet)

Almost every year, a few penny stocks emerge from obscurity to make huge profits for their investors. Penny stocks which soar in value are often in "hot" industries; industries perceived as fast growing and offering great future potential. In recent years, "hot" industries have included mining, energy, health care, and high tech. Penny stocks can be extremely lucrative when they work out. However, the risks are very high. The vast majority of them fail for various reasons. Generally, playing penny stocks is more gambling than investing.

However, if you are determined to pursue the potentially huge profits penny stocks occasionally deliver and are willing to take the big risks; here are a few tactics I suggest for your penny stock portfolio.

1. Don't invest if your personal life is troubled. The market provides very expensive therapy.

2. Use a separate gambling account to buy penny stocks. This is money you are fully prepared to lose. It is money you will never need for your living expenses, family needs, emergency funds, retirement savings etc. Never mingle it with your regular investments or other accounts. Limit your gambling account to a tiny percentage of your liquid assets such as 1% or less.

3. Use stop loss orders religiously to help limit losses or protect profits. They can be a useful tool, however stop losses will not protect you if your stock loses much of its value or becomes worthless.

This is an example of how they work:

You buy ABC stock at $10 per share. You place a stop loss at $8. This means that if the price of ABC declines to $8, your stop loss order will become a market order and ABC will be sold at $8 or the best available price. However, there is NO certainty of the price you will ultimately get. In a fast declining market, ABC could sell for FAR less than $8. If ABC becomes worthless, your stop loss will likely be unfilled and you will receive nothing for your shares.

You can also use stop loss orders to protect profits if your stock rises in value. Some exchanges do not accept stop loss orders.

4. Never pyramid your profits to buy more stocks.

5. Let your winners ride. Raise your stop loss orders in an attempt to protect your profits. Don't sell just for the sake of taking a small profit.

6. Never buy penny stocks on margin (borrowed money).

7. Invest in companies based on simple ideas, products or services. As legendary investor Peter Lynch put it, "Never invest in an idea you can't illustrate with a crayon".