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How To Choose The Right Stocks To Buy

How to Choose the Right Stocks to Buy

Everyone wants to make a profit and feel like a winner. Yet, not everyone has the right touch to make it to the top. Choosing the right stocks to buy is important, especially when you have a limited amount of funds to invest. However, what are the necessary factors you should take into consideration before purchasing stocks, especially if you are newcomer in the business?

Choose stocks that are suitable to your lifestyle and personality

Most experts or long time traders would tell you to choose stocks that compliment your lifestyle and personality. True, because in this way you will understand more about the type of stocks you are buying.

They continue to say that when comparing stocks to your lifestyle and personality, you need to ask yourself such questions as to whether you are the sort of person to stay on a computer keyboard for long hours or a short time. If you are willing to work at a computer station for long hours it may be that you are the type of person who is willing to invest in stocks that produce profits over a long-term period. People who do not sit around a computer for long hours may be the ones who are willing to settle for short-term or quick profits.

Take time frame into consideration

Some stocks will take a much longer time to increase than others. Decide whether you prefer short-term or long-term profit. If you choose short-term profit as your answer then you more or less have to settle for a small profit. Long-term stocks tend to do a whole lot better because of the potential these stocks usually possess.

Stocks, though, usually seem to trend upward and downward, even sometimes for long periods. As a result of these upward and downward trends, short-term traders are able to make a quick profit when an upward swing occurs.

Still, there are some traders who want to collect dividends from their stocks. This might mean that you may have to wait for a longer anticipated period before trading your stocks in order to receive dividends. If it is your desire to collect dividends from your stocks then you are better off being a long-term trader.

Understand the movements of stocks

Understanding the movements of stocks is necessary, especially if you are new at stock trading. Stocks usually fall in price just after dividends are paid out to investors and then climb again. This is very important to understand if you are in stock trading as a long-term investor.

Then there are stocks that have a personality of their own and tend to be "trendy." These stocks will travel steadily for some time without losing pace. Understanding when it is favorable to buy these type of stocks will result in much financial rewards.

Research the company

Some stocks are more risky than others chiefly because of the performance of the company that issue them. Companies that are just coming on the stock market have to make out a prospectus for possible investors to learn about its performance and to inform the public the type of stocks they are offering as well as how many stocks available for sale. Young companies do not usually perform as well as older ones do and so they are considered more risky to invest in.

Find out if the company is consistently growing. Companies that show inconsistent growth are bad to invest in. Investors are looking for solid and consistent earnings growth. A good company will grow regardless of a negative stock market or bad economic conditions. Look at the past five years and see if the company has made progress during that time. If the company does not show a positive trend in profit increase then it is best to shy away and do not invest your funds in it. For older companies, you can do a research online about their performance. Information about company performance can be found on most quote sites such as reuters.com.

Find stocks that are doing well

There are some sectors that might not be performing as strong as others. When you are choosing stocks to buy, make sure to choose ones that are performing well in their sectors. Do not be carried away though if a sector is doing well because while a particular sector or the market on a whole might be performing well, a stock that you may be interested in may be showing poor results.

If you are working the market as a bear, stocks that are showing poor performance will do you nicely because you can make a profit when price falls. If you are a stag, stocks that seem to hit rock bottom are your best picks because you can make a profit on the upward trend.

Take liquidity into consideration

Sometimes you may see the need to liquidate your stocks quickly and finds it difficult to do so. It is therefore to your best advantage that you buy stocks that trade in the thousands daily.

Take price into consideration

When you are buying stocks in a company, go with what you can afford. Stocks that are high priced does not necessarily mean that they are strong performing stocks. Also, stocks that are low priced do not mean that they are poor performers either. If you are in the market as a bear or stag, price will play a major role when buying stocks.

Buy a number of stocks

Do not settle for just buying one company stock. Instead, buy different ones in case if a stock fails to deliver you can still make a profit from the others. The saying is true, "Never put your eggs into one basket."

Today, there are many challenges when it comes to buying stocks and it is to your best interest that you learn how to overcome them. Still, the rewards are great if you choose the right types of investment in the market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.