What Stocks Should I Purchase?
With thousands of publicly traded stocks available, it is a challenge for any investor, but particularly those new to investing, to decide which stocks to purchase. Although there are many investment advisory services that provide stock recommendations to their subscribers, stock selection is a highly individualistic process that requires you to assess your financial goals and your tolerance for risk. Deciding whether you want to be a short-term stock trader or a long-term investor also helps guide your stock selection process.
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Your Investment Goals
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Everyone's goal is to make money on stock investments. But money can be earned from both capital appreciation and dividends -- the quarterly cash payments many companies make to their shareholders. If your primary goal is to build the value of your portfolio for the long run, growth stocks with good prospects for appreciation would be your choice. If you have a need for current income, large stable companies that pay regular dividends would be a better choice.
Short-Term Stock Choices
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Some investors look for stocks that are undervalued and due for an increase in price in the near future -- hopefully the next few months. They look for companies in sectors that are not currently popular with investors, knowing that investor sentiment can quickly change and the stock would then rise in value. Short-term investors look for stocks that could get a boost from good news, such as a medical device manufacturer receiving FDA approval for a new product with a huge potential market. They hold the stock only long enough to reach their profit objective and then sell it.
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Long-Term Stock Choices
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Other investors stay invested in a stock for the long run, a period of years. They often use a dollar cost averaging strategy -- purchasing a fixed dollar amount of stock shares at pre-planned intervals such as at the end of each quarter. Long-term investors believe the market will continue to provide good returns over the long run, even if there are some periods when stocks decline. Their stock selection process involves looking for companies that have consistently been able to grow their earnings in the past because of solid business fundamentals such as operational efficiency, excellent management and product innovation.
Risk Tolerance
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Your desire to make money can come into conflict with your fear that you might lose the hard-earned funds you have committed to the stock market. Gauge your tolerance for risk before you begin the stock selection process. Stocks are given a number called a beta, which measures how fast they go up and down in comparison to the overall market. Higher beta stocks, those with betas greater than 1, go up quickly during buoyant market conditions, but can plummet when the market's mood turns negative. If you would have difficultly coping with losing a significant portion of the funds you invest, consider lower-risk stocks, at least in the beginning.
Personal Interests
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Investors often choose stocks in industries they are familiar with. Because they understand the business fundamentals of these companies, they are better able to make judgments about which companies are likely to grow their revenues and profits in the future. If a certain sector interests you, such as energy companies, you will find it more fun to study the information available on the companies in that sector and further your knowledge. The more informed you are about companies and their industries, the better investment choices you will make in the long run.
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