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Choosing Stocks in Industries You Understand

The best investors focus on businesses they know and understand, or they carefully research an industry prior to evaluating specific companies in that industry. Before buying stock, savvy investors get to know the company’s business model and how it stacks up to other companies in the same business. They develop an understanding of the company’s opportunities, challenges, and the resources it has in place to overcome any challenges and maximize its opportunities. By knowing the industry and how well a company is positioned in that industry, you have a significant edge over other investors.

When you’re looking for dividend stocks to invest in, start with what you know. If you’re in the medical field, you’re probably more aware than most people which pharmaceutical companies are the leaders and how effective they are in terms of sales and customer service. Be careful, because any nonpublic information you receive in an official capacity may be considered insider information. However, any information that is public but not widely disseminated can give you an advantage.

The more you know about a particular sector or company, the more your head is in the game. You can make better investment decisions even before the data shows up on a quarterly report. Write a list of all the industries you come in contact with through your profession. Your list can include the company where you work, its vendors, and any companies your company serves. Then add hobbies and interests and companies you’ve heard about through your pursuit of these extracurricular activities. If you’re a video game aficionado, for example, you may have valuable insights about the video game industry you didn’t even know about! Your list can serve as a valuable tool in identifying leads.

Be an information sponge. Everything you see, hear, read, consume, and experience can help you identify potentially good dividend stocks and make better investment decisions. Seek out credible information, remain skeptical, and verify all the information against other credible sources. Just because a top analyst rates a stock as a strong buy doesn’t make it so — conditions on the ground may prove the stock was more like a strong sell.

Just because you’re well informed on a few industries doesn’t mean you should concentrate too much of your investments there. Putting too much of a portfolio in one company or industry that turns sour can destroy the portfolio, so you still need to diversify. And be especially careful of buying too much stock in the company where you work.

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