Stock Picks Center

Written by Jacey Harmon
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To a novice investor, the stock market can be a maze of confusing lingo and complicated ratios. Before any investor steps into the market they must determine which type of investing they are going to participate in. To do this, one must answer some questions. What are your investing goals? What is your time frame? Most importantly, you need to determine what your risk level is.

Stock Market Risk

Every type of investing requires a person to take on a certain degree of risk. Yet, there are varying levels of risky trading. For example, investing in an index fund carries far less risk than selling a stock short. Therefore, it is imperative to determine your risk tolerance prior to engaging in any investment model. Once you have established your risk tolerance, you can begin doing research on what type of investing matches your risk level.

No matter what your risk tolerance, there are ways to reduce your risk for any type of investing. Being an educated investor will drastically reduce the level of risk you accept. Educated investors have the ability to properly identify market trends. An overwhelming majority of stocks will follow the market trend. To reduce your risk, you will want to buy stocks only when the market is trending higher, and avoid buying when the market is trending lower.

Another way to reduce your risk is to have a solid plan to keep losses small. Losses in the market are unavoidable. There is no way any person will be right 100 percent of the time. Successful investors have developed a plan which forces them to sell when their loss is small. I sell, no questions asked, if a stock I buy closes eight percent below my purchase price. Small losses are easier to recover from than large losses, and they are not as damaging to the confidence either. Do the math, an eight percent loss requires a nine percent gain on the next trade to break even. A 25 percent loss requires a 33 percent gain, just to break even. If you lose 50 percent, you will need a double to get back to square. A nine percent gain is a lot easier to come by than a 33 percent and 100 percent gain.

Picking Stocks

Again, the type of investing you focus on will determine which type of stocks you will pick to buy. Growth investors will search for companies who have high earnings and revenue growth rates. Value investors will search for companies with predictable earnings and a depressed stock price. Day traders want to find stocks which have high volatility.

Whatever type of trading you prefer, there are some analysis techniques that you will need to learn. Technical analysis is essential for almost any type of trading. Technical analysis is that which analyzes market conditions. Price and volume analysis is the most common type of technical analysis. There are secondary technical analysis tools people use as well: oscillators, Bollinger bands, and stochastics to name a few.

Fundamental analysis is important to understand, unless you are short selling and day trading, because it indicates which companies have consistent fundamental growth. Fundamental growth--earnings and revenue growth--is arguably the most important influence over a stock's long term move. Studies have shown companies which experience explosive earnings growth have had accompanying explosive price appreciation in their stock prices. Fundamental analysis is not good for determining when to sell a stock. This is because the market looks ahead, about six months, not backwards. By the time a company's fundamentals start to weaken, the stock price has already declined. To determine when to sell a position, you must rely on technical analysis.

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