Picking Stocks

The multi million dollar question, what stock should I pick? I wish I could just tell you to pick (insert stock name here), you could purchase shares of that stock and you would be making money tomorrow. Unfortunately I can't do that and could get myself in a lot of trouble if I tried. However, not to be completely useless I would like to provide with different strategies that you can use to analyze a stock and give you the pros and cons in looking at a stock with that methodology. Here are the strategies that I'm going to discuss in this article; watching the volume, picking high flyers, buy what you know and picking on valuation.

 Watching the volume, most of the time when you look at a chart showing a stocks price over time, you will see on the bottom a line graph that shows the volume for each day of trading, for example go to this web page, http://finance.google.com /finance?q=abb , on the bottom of this chart you will see the volume represented by vertical lines for every day. When you are trying to pick a stock based on volume, what you are going to look for is a day that took place within the past month where there was a large spike in the volume and following the spike there was a steady increase in the price of the stock. The reasoning for picking a stock like this is pretty simple, when there is a large jump in volume more likely than not it is not because a bunch of Joe Shome's like you and I all the sudden decided that they were going to purchase the same stock. Instead it's because big players, such as mutual funds or Warren Buffet have decided that the stock is a good investment and when they decide it's time to purchase shares of a stock they don't buy in the hundreds.

Now, the first thought that many people will have it that it's too late to get in, the shares have been purchased and the price has been driven up, so it's too late. Fortunately in most cases this isn't true, when a lot of shares are purchased a one time it's because there is a strong belief by larger institutions that this company is going to be strong over a long period of time, institutional purchases are not made as day trades. So even if you do purchase shares of the stock and it drops a little instead of dropping the stock right away this should be seen as a buying opportunity.

The next way to pick a stock is to go for the high flyers, I will say right off the bat that I have only bought a couple stocks using this strategy and while I made a lot of money on a couple I also lost a lot of money on a couple others. When you are buying a high flyer you are taking a big risk, but at the same time this is where you can pick up the biggest reward. To find a stock that is a high flyer it's pretty simple, you look in the paper at what company is making headline, listen to friends and analysts and look at the various money sites to see what stocks have had the best performances lately. Once you have decided that you have no fear and are willing to take the giant risk for a chance at the giant reward you have to remember that once you have made your money get out. The thing about the stocks that make huge runs up is that in many cases they make even quicker runs back down to earth.

Buying what you know, this is the strategy that I have had the most success with personally and is a strategy that was given to me by my dad in a passing conversation. This goes to show that you never know where the best advice will come from. Now what does it mean to buy what you know. It's easy you sit down and make a list of the places that you, your friends and your family spend their money. Once you have this list you find out which ones are publicly traded and lastly you do some research to confirm that the company has a viable stock. While you may love a company, you do need to make sure that the company is good everywhere and not just in you back yard, plus you may want to look at the price historically and make sure that you aren't getting in while the price is too high.

 The last strategy is to purchase on valuation, this is looking purely at the numbers. Common numbers too look at are the P/E ratio, discounted cash flow, growth percentage and earnings per share. The next article will go more into the definitions of all these number and how to use them when picking a stock, since no matter how you are going to pick your stock you will need to familiarize yourself with their number so you can be comfortable with your pick and more importantly get a since of a good time to put a stop loss on your stock to look in your profits.

 Hopefully this article has given you some useful information on picking a stock and you will now feel more comfortable when it comes time to place you order.

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