How To Buy Stocks

The biggest secret to stock trading is a surprise to many first time investors. The reason it’s a surprise is that they don’t consider speculating in market a form of gambling. Like gambling, making money on the market is not a guarantee and if you don’t know what you’re doing, you can lose everything and similar to gambling, if you don’t know how to play the game you will be cheated.

Brokers are not your friend and they don’t care if you make money because they often get a commission when you sell and when you buy. At other times, they’ll get a commission if you purchase a specific money market account. Either way they are paid, but who takes care of your interests? The only way to become rich in the market is by understanding the fundamentals of picking stocks.

One of the most common mistakes when people start trading is to begin without investment style. Are you looking for quick profits or do you plan on “buying and holding”? Most successful investors, such as Warren Buffet, “buy and hold” stock, while the majority of short-term traders often lose money. The main reason is that the stock profit doesn’t’ cover the short-term capital gains tax (25%) and the brokerage fees. This means that a trader would have to make a short-term capital stock gain of over 50% in order to make a profit.

This is the main reason that the emotional factors of stock trading affect profitability. Stocks will go up and down during the course of a hold. It takes a large amount of patience to hold a stock when it's on it way down because of a temporary correction and to understand the fundamentals of trading in order to understand that the correct will not affect the companies longer term profitability.

This is where a trading diary becomes a significant tool. Successful investors understand that keeping a record of their transactions will help them stay on a solid course based on the fundamentals of trading and not the emotional turns that happen during the course of a market year.

The only way to overcome the emotional factor of trading is to understand the fundamentals of trading. The fundamentals are used to research the various companies available for stock trades in order to pick the best “bets” for long-term gain. Once you have picked your fundamentals you have to stick with them and stay as long as their fundamentals conform to the standards you have set or they have reached your sell price.

Sometimes the fundamentals fail, when a stock becomes “popular” with the public. These stocks are usually household names that have the name recognition to become a “Good” buy even though their fundamentals are weak. One thing long term investors understand is that statically using fundamentals to choose stock is the best tool in predicting stocks.

Profitable traders understand that is essential to use a fundamentals strategy when investing in the stock market, each of the following areas covers a specific aspect concerning the fundamentals of a company. When conducting stock research these are the main fundamentals when picking a stock.

The Dividend Yield – Larger companies should pay out dividends and if you are interested in acquiring an establish company for your portfolio then the purchase of preferred stock maybe a choice for you. Smaller and growing companies tend to reinvest so their dividends tend to be small or non-existent.

P/E Ratio – P/E stands for the current stock price (P) and the annual earnings per share (E). To find out the P/E Ratio for a company, traders must divide the current stock price (P) by its annual earning per share (E). This ratio will tell if the company’s earning per share of stock has been increasing or decreasing. The lower the P/E

Ratio the better, smart traders look for cheap stocks with low P/E ratios.
Trading Volume – High trading volume indicates that other traders have discovered the stock. The goal is to have a good fundamental stock with a low trading volume.

12-month underperformers – Sometimes a well-traded stock with good fundamentals falls below is regular stock level. You may hear brokers call this a “buy window “for a stock.

Profit Margin - An indicator of success is a high net profit margin. Profit margin is calculated from percentage of money made after expenses (net profit) divided by gross revenue.

Debt to Equity Ratio - This is an area which can get many an investor in trouble because without looking at this number an investor will have problems determining if a company is having financial problems. It’s essential that any stock pick have a low debt to equity ratio.

With these stock fundamentals in place and monitored, any trader will increase their odds of picking successful and profitable stocks.