How to Pick a Hot Stock

It sounds so easy--find a stock about to soar in value and buy it before others can push up the price. That kind of risk appeals to some investors, and for them the trick is to pick that hot stock and not lose everything on a bad investment. Here's how to go about it.

Difficulty:

Moderately Challenging

Instructions

1. Be skeptical. Your email inbox may be flooded with hot stock picks, but you should treat them all as spam unless you know the source. The people behind most of these come-ons have their own moneymaking agenda. There is little government regulation on these ads, so don't believe all their claims.

2. Do your own research. A stock becomes "hot" because its value is about to increase dramatically, so pay attention to the business press, national trade journals and even knowledgeable bloggers to find signs that a company is about to jump in value. Look for word of a research and development breakthrough or a big new contract.

3. Know your competition. Stock prices are determined by supply and demand, so if many people are buying a company the share price will go up. Understand what other investors are looking for so you can predict what factors can send prices up and create a hot stock to pick.

4. Understand the risks. It's possible to lose a lot of money in a very short amount of time, even on so-called "penny stocks." Even experienced traders can get burned trying to pick a hot stock, so be especially wary if you are new to the markets.

5. Watch what the big wigs are doing. Officers of a company must report when they buy or sell their own shares, so paying attention to what they are doing could signify that prices are about to take off.

6. Buy what you know. Most experts agree that investors can get into the most trouble when they are buying in a field they don't understand, since they can't accurately interpret trends and signals.

7. Investigate before you trust. You can get hot stock pick suggestions from newsletters, blogs and even your cousin, but they may not have your best investment interests at heart. They may have their own incentive to tout a hot stock to you, even if there's little chance that it will go up in value.