This is one of those eternal questions in which, if a definitive answer exists, it is kept under lock and key at the U.S. Treasury. But the truth is, there is no definitive answer. The choices when it comes to how to pick stocks are as varied as the question is vague, because upon closer analysis this is like asking how you choose a car or a life mate.
The only answer that cuts across both is this: with great care.
It depends on a lot of things.
Mainly, no matter what the other variables may be, your choice of stocks depends on your personal goals, both short and long term.
On one level the objective is easy to define: you want stocks that will go up in value, that you can sell at a profit. From there, though, a myriad of variables kick in and things quickly get more complicated.
For example, would you pick a stock that never went up a penny if that stock returned dividends at a rate of over ten percent per year? Many would.
Would you pick a stock from a company that plays in a niche market that is subject to wild fluctuations and economic trends? Again, many would. And in this case, many more wouldn’t.
Neither are right or wrong. Both depend on the investor’s personal needs.
It all comes down to balancing goals and your tolerance for risk.
Investing for the short term is altogether different than picking stocks for the long term. Short term price fluctuations are highly connected to current economic conditions and forecasts, and sometimes have little or nothing to do with the underlying health of the company listed on the stock certificate.
This type of criteria is called technical analysis, and it drives choosing of stocks in hope of a short term gain. Dividend payouts, under this objective, have little or nothing or no impact on short term performance… unless the company is about to announce a change in their dividend policy, which would have an immediate and often dramatic impact on the current trading price.
Which is why, even with a technical stock choice, you should also look closely at the company itself.
Long Term Investing
Long term investing for retirement or college planning needs to consider the company itself as much or more than it does the economy and the current trading environment. Long-term forecasts and market conditions become the primary variables here, with the goal of determining the prospects for a firm’s growth over time, and in context to the competitive and market environment in which they exist.
Other influences come to bear on both the short and long term. Sometimes people like to follow the advice of known experts (or so-called experts; nobody really beats the market over time), such as television’s Jim Cramer or a host of financial bloggers and columnists.
Liquidity is another issue.
Smaller, non-listed firms may hold bright prospects for growth (in which case you’ll need to invest off the market in a direct fashion), but these stocks may be difficult to unload when you need the cash.
About the only consistently reliable advise when it comes to picking stocks is to make sure you understand what you are getting into, both in terms of basic vocabulary and mechanical knowledge of investing, as well as your own needs and tolerance for risk.
A few successfully navigate these waters alone. That said, your choice of mentor and advisor can be as important as your choice of stocks themselves.
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