Stock Investing For Dummies
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You're investing in stocks — good for you! To make the most of your money and your choices, educate yourself on how to make stock investments confidently and intelligently, familiarize yourself with the online resources available to help you evaluate stocks, and find ways to protect the money you earn. Also, be sure to do your homework before you invest in any company's stock.

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The 10 most important points about stock investing

If you’re committed to investing in stocks, keep the following points in mind while you make your choices and reap your rewards. After all, stock investing is fun and frightening, sane and crazy-making, complicated and simple — and you may need reminders to stay focused.

  • You’re not buying a stock; you’re buying part of a company.

  • The primary reason you invest in a stock is because the company is making a profit and you want to participate in its long-term success.

  • If you buy a stock when the company isn’t making a profit, you’re not investing — you’re speculating.

  • A stock (or stocks in general) should never be 100 percent of your assets because stocks don’t always do well in all market conditions..

  • In some cases (such as a severe bear market, a market that has prolonged price declines), stocks aren’t a good investment at all. A bear market, however, may offer buying opportunities for stock in profitable companies.

  • A stock’s price is dependent on the company, which in turn is dependent on its environment, which includes its customer base, its industry, the general economy, and the political climate.

  • Your common sense and logic can be just as important in choosing a good stock as the advice of any investment expert.

  • Always have well-reasoned answers to questions such as “Why are you investing in stocks?” and “Why are you investing in a particular stock?”

  • If you have no idea about the prospects of a company (and sometimes even if you think you do), use stop-loss orders or trailing stops to protect your position in the event of a market decline or crash.

  • Even if your philosophy is to buy and hold stocks for the long term, continue to monitor your stocks and consider selling them if they’re not appreciating or if general economic conditions have changed.

Checking important company fundamentals before investing in a stock

Don’t underestimate the importance of a little detective work! Before you buy stocks, do some research on the companies that you’re thinking of investing in. Pay attention to the following key components when you look at a company’s main financial statements (the income statement and the balance sheet). These numbers should be:

  • Earnings: At least 10 percent higher than the year before.

  • Sales: Higher than the year before.

  • Debt: Lower than or about the same as the year before. It should also be lower than the company’s assets.

  • Equity: Higher than the year before.

Financial measures to consider before investing in a stock

You’re thinking of buying stock in a company, but before you invest your hard-earned money in hopes of a profitable return, check out some financial ratios that can help indicate whether the company is on sound financial footing. Here are key measures to consider and what values you want for them:

  • Price-to-earnings (P/E) ratio: For large cap stocks, under 20; for all stocks (including growth, small cap, and speculative issues), not over 40.

  • Price-to-sales (P/S) ratio: As close to 1 as possible, but 2 is good enough.

  • Return on equity (ROE): Going up by at least 10 percent per year.

  • Earnings growth: At least 10 percent higher than the year before. This rate should be maintained over several years.

  • Debt-to-asset ratio: Debt should be half of assets or less.

A mandatory reading list for stock investors

Before buying stock in a company, you need to do a little light — or not-so-light — reading. Investing in stock without checking out the company beforehand is a recipe for disaster. So before you plunk down your money, be sure to read the following:

Internet resources for stock investing

With the tools available on the internet, you have no excuse for not researching any and every potential stock investment. The following list of resources links you to some of the best financial websites around. Look at what they have to say about a company or an investment before you take the plunge.

Reassuring points for nervous stock investors

With how crazy and volatile the world looks sometimes, it’s important to note that prudent investing isn’t just about what you invest in, but also how you invest. If you want to build long-term wealth through stock investing and still be able to sleep at night, then consider these points:

  • Invest in stocks of profitable companies that sell goods and services that a growing number of people want. Your stocks will zigzag upward.
  • As long as you invest in stocks and exchange-traded funds (ETFs) that provide for human needs (rather than wants), your long-term investing success is more assured.
  • If you keep your money diversified broadly across stocks, ETFs, mutual funds, and hard assets (such as real estate and precious metals) and keep adequate cash in the bank, you’ll be much safer in the long run because these diversified assets perform well in different economic conditions.
  • Keep informed every day about your portfolio, the financial markets, and the general economy to help calm the fear and anxiety that come from the unknown and the surprises that are inevitable.
  • Use investing tools regularly (such as stop-loss orders and put options) so that you have more control against the downside and more peace of mind.
  • Keep a tight control on your debt and finances. Maximize the money flowing in, and minimize the money flowing out. In turn, this practice can ease the pressure to invest aggressively with a short-term focus and help you focus more on the longer term instead.

About This Article

This article is from the book:

About the book author:

Paul Mladjenovic is a national speaker, educator, and author. He has over 35 years of investing experience and has helped thousands in his national live and online seminars and coaching. He owns Prosperity Network and and has written High-Level Investing For Dummies and the first five editions of Stock Investing For Dummies.

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