How to Trade Stocks for Long-Term Growth
Long-term growth trading is more about stock selection than having to make daily trading decisions. Growth stocks need time to reach new markets and accumulate steady, dependable profits. Trading should only occur through regular investment plans that include a money management strategy, protective stops, an entry and exit plan, and fundamental research.
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Instructions
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Use the stock screener ( see resources) and make three screens. Screen 1 should contain a list of all companies with five-year growth rates in excess of 15 percent. Screen two should cull a list of stocks with earnings compounding at 15 percent per year. Screen 3 should compile a list of stocks with capitalizations (stock price times shares outstanding) in excess of $500 million. Compile a final list of stocks that meet all three sets of criteria.
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Focus your research on companies ranging from $500 million to $10 billion in size. Find growth stocks that have technologies or special niches that hold the possibility of greater sales in the future through industry and scientific periodicals. Stocks in the small cap and mid cap range hold the best possibilities for growth as they develop new markets. Compile through stock screens companies with fast rates of growth or much talked about companies.
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Know your limits as an investor. If you cannot undertake the fundamental analysis of growth stocks, use mutual funds or exchange traded funds and employ the technical steps used to enter and exit markets.
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Use the Value Investment Survey and other subscription services to get detailed balance sheet information and recent developments about the company of interest. Value Line represents the single largest stock resource in the United States with recent financial reports, commentary, and resources to contact companies directly for further information. Understand the product line of the company and assure yourself that there are markets and applications that can lead to further growth.
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Buy stock only when the major trend is up. Track the broad indicators of the market like the S&P 500 and invest only when it is above the 200 day moving average. Use references like Investment Business Daily to guide you as to the current status of the market and to find stocks that are appealing on a technical basis.
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Buy a stock when its 10 day moving average of price exceeds the 200 day moving average. Fundamental analysis (balance sheet study) is necessary to understand the business but buy stock only when technically appropriate, such as only owning stock when it is above its 200 day moving average. This is necessary in order to receive above average returns. Always place a protective stop just below the 200 day moving average once you have purchased a stock.
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Diversify your purchases so that no one investment is more than 5 percent of your entire portfolio. Make certain that at least 10 percent of your total portfolio is always in cash or cash equivalents such as short term bonds. Never invest in bonds beyond five years or the first call date of the bond to avoid early redemption.
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Set protective stops at the time of purchase. Protective shops should placed no more than 8 percent below the purchase price of the stock. Have an exit strategy for every stock you purchase.
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Tips & Warnings
Trade stocks with a plan and follow the plan with disciplined trading. Never trade on hunches and rumors. Decide your level of investing expertise and whether you have the necessary discipline to trade with a consistent effort. If not, strongly consider interviewing investment managers or using mutual funds for the bulk of your investing.
Always practice trade before investing real money. Experiment under bull and bear markets, different time frames, and different stock industries. Use online trading. It is cheaper with more effective research than a broker can provide.
References
Resources
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