How to pick stocks

Anybody who has ever tried to enter the stock market knows it can make your head spin. There are just so many choices to make, and so much information to digest... all of this with real risk of losing your hard-earned money. No one knows the 'secret formula' to picking stocks successfully. Trades use sophisticated mathematical models to try and predict where the market is going, but the truth is if you make good educated decisions, you too can pick winners.

Instructions

Difficulty: Moderate

Things You’ll Need:

• Brokerage account
• A few hours of research a week

1. Define your investing goal. How long do you plan to hold on to your stocks? What return are you expecting in that timeframe? Are you willing to stick with your picks through the ups and downs of the market? All these questions will influence the kind of stocks that you purchase.
   
   Smaller companies generally have more volatile stock, meaning you can see quick gains but also quick losses. Larger companies tend to be steadier, and many pay dividends (which often times provide the bulk of your earnings from that stock, as opposed to the change in market value).
2. Research the industry/sector. Before you start looking at individual stocks, always take a look at the bigger picture first. If you'd like to buy shares from an air trasportation company, for example, you want to ask questions such as:
   
   - 'How has this industry been performing in recent years?' If many of the players have been struggling you definitely want to find out why, which leads to the next question to ask:
   
   - 'Is this market cyclical?' The whole economy goes through ups and downs, it's the market's way of enforcing the 'survival of the fittest'. Look at the mortgage market today in '07, for example, only the big, strong players survive while the weaker ones that made bad decisions either go broke altogether or get bought out.
   
   - 'What external factors affect this sector's operation and profitability?' Going back to the airline example, obviously fuel prices trends will have a huge, direct impact on their operation.
   
   The more of these kinds of questions you can ask, the better.
3. Look at competitors. This is just as important as looking at the industry as a whole. You want to identify what the competitors of your company of choice are doing differently, how they have performed recently, what products they are looking to release in the future, etc. You'll want to research anything and everything that you believe will differentiate your stock of choice from its competitors.
4. Finally, take an in depth look at the company you chose. In this case you want to get a sense for how successful their managing team is, what your personal experience with that particular company is, what they are doing to gain market share, etc.
   
   When you are comfortable with all aspects of your decision, i.e. that the industry is headed toward positive times, that its competitors aren't taking away market share and profitability, and that your company is well run and poised to continue its success, you can rest assured you have a good chance of seeing nice returns.
5. Keep up your research once you purchase your stock: In the corporate world things happen quickly, and in a few months what was a promising looking company can start to look sour. That's why it's important to keep reading up on the industry, the competitors and the company whose stock you own. Do so consistently once you own the stock, and if you're no longer comfortable with all those aspects, it's time to rethink your investments.
6. Diversify: I'm sure you've heard it before and I will say it again. Diversification is the name of the game. It's important to be aware of your risks. A simple example, if you had bought those airline stocks, now you'd be exposed to hikes in fuel prices. Any unexpected raise in prices would harm your investment. However, this same event would be an added boost for an oil company. So if you hold the stocks of a well run oil company and a well run airline in your portfolio, they will both grow together, and they mitigate some of each other's risks.
   
   To continue with the example, if a war or a terrorist attack happens, this could affect both your stocks negatively. However if you have a well-run defense company in your portfolio, you are mitigating that risk... you get the idea!