Investing your money in the stock market can be intimidating. There are many facets to investing including stock picking, diversification, and portfolio maintenance. While you may have heard many stock market success stories (and not-so-successful tales as well), you may be asking yourself, “how can I make money in the stock market?”
The fact is that making money – even in the stock market – requires work on your part. The world’s most successful investors study a multitude of factors, and ask many questions.
Researching potential investments – also known as “due diligence” – is the most crucial step in investing. Only by carefully investigating every security before committing capital, can an investor mitigate risk, and profit from the market.
How Due Diligence Works For Stock Picking
The main goal in any investment strategy is to make money. While this goal may seem clear, how to achieve it may not be. The first step when researching potential investment opportunities is to shop for companies that are undervalued by the market.
When a company is undervalued by the market, it’s share prices are low due to circumstances that are beyond the company’s control. The market fluctuates based on a variety of factors, and can sometimes fall due to situations such as political unrest in other countries, or news events unrelated to specific companies or industries.
For example, the stock market may fall due to political unrest in the middle east, but that has little to do with the share price of Johnson & Johnson, although the share prices may fall along with the rest of the broad market.
These dips can be prime buying opportunities, as long as they do not reflect trouble within the company. In short, it is more important to find out why a stock is cheap before purchasing the security simply because it is cheap.
Another factor that should be taken into consideration is a companies P/E (price-to-earnings) ratio. By looking for a company who’s P/E ration is considerably lower than its peers, you are attempting to find a company that it undervalued, but also has growth potential.
Watch The News For Buying Opportunities
Wall Street is infamous for overreacting to bad news. In addition to world events, the market may overreact to missed earnings, changes or issues with corporate executives, or other circumstances that may be seen as bad news, but may be wholly unrelated to overall health of the company.
The best example of the is the health of Apple co-founder Steve Jobs. As Steve Jobs’ health has often been the subject of worry and speculation, often driving the share price of Apple down, Apple itself is a fantastic company with huge market-share, no debt, and high earning potential, and remains that way regardless of the health of Mr. Jobs.
So how can you tell an Apple from an Enron? The key is to look deeply into the financial health of the corporation. Look for companies with strong earnings prospects, positive cash flow, and low debt loads. In the words of super-investor Warren Buffet, “look for a company that could be run by idiots, because one day it will be”.
What Are The Mutual Funds Investing In?
Look at the portfolios of successful mutual funds and other investors you admire. The portfolios of mega-investors, such as T. Boone Pickins and Mr. Buffet are available online, and can give you valuable insight into what to buy and what to sell.
It is also important to know when to realize gains as well as when to cut your losses. Formulate a plan that is within your investment objectives, and utilize stop-loss orders as well as trailing-stop orders to stick with your strategy. These automated features allow you to take emotion off of the table, and can help keep your investment strategy on track.
There is simply no substitute for hard work, staying up-to-date on financial news, and doing your homework. By always being on the lookout for opportunities and trends, you will be better positioned to realize gains and become a stock market success story.
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