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How To Pick A Profitable Stock

Dedicating a certain amount of money to buying stocks is easy, especially when you have the funds (small or large) at your disposal. The difficult part is choosing the right stock to buy.

Are you having trouble making the right investment choices?

Not to worry, I’m here to help. I’ll be giving you some
tested and trusted tips on how you can buy the right stocks and enjoy the benefits in the long run. Let’s go.

How To Spot A Profitable Stock

One of the most effective ways to build wealth over time is by investing in stock, but you have to buy the right ones first. Here’s how to spot the good ones:

Price: Knowing the price of shares and their history as you evaluate a company’s stock, will indicate whether you’re buying a profitable stock or not revenue growth. When a company’s revenue increases, so will its share prices.

 Buy stocks from only companies that are consistent with revenue growth.

Dividend: Search for companies that pay high dividends to their shareholders and invest in those. Only thriving companies can pay high dividends.

Market capitalization:

Companies with large market caps are usually large and diversified enough to be negatively affected by a small change in market factors. Think about companies like Coca-Cola, or ExxonMobil, they are large,
diversified companies who have given their investors good returns for decades. 

Historical prices:

When on the hunt for the stock, it isn’t enough to only
look at the current value of the shares, also take a look at the company’s share history. You can date back 5, 10, or 15 years, just so you know how the company has been holding out over long periods.

Companies who have good historical share prices are your
best bet. Keep in mind that the past doesn’t necessarily define what will happen in the future, yet, it still remains an excellent indicator of what you can expect.

The Industry:

Before you buy stocks, you need to take a look at the industry in which the company competes. If it’s a failing or fading industry, then be advised to back off. On the other hand, if it’s an industry that is on
the rise, then you can feel safe to invest in its stocks.

5 Stock Market Investment Tips:

Here are 5 stock buying tips that’ll increase your chances
of making decent profits over time.

  • Don’t buy stocks based on emotions.
  • Pick the companies, not the stocks.
  • Make plans for panicky times.
  • Build up positions gradually.
  • Avoid trading overactivity.

let’s look deeper into each of these 5 tips.

Don’t Buy Stocks Based On Emotions According to Warren Buffet, one of the richest men in the world  “Success in investing doesn’t correlate with IQ, what you need is the temperament to control the urges that
get other people into trouble in investing”. Here, Buffet is referring to
investors who make bad investment decisions based on emotions. One of the most common ways investors negatively affect their portfolio returns is by engaging in trading overactivity that’s triggered by emotions.

Pick The Companies, Not Just The Stocks.

Sometimes, one can forget that behind every stock you see, is an actual business. You need to keep in mind that by buying a share of a company’s stock, you automatically become a part-owner of that business. When you’re searching for the right stock, you will
have to consider several investment factors, but your buying decisions will be better made if you see yourself as one who wants to buy into the business and not just the stock. With this mentality, you will ask yourself relevant questions regarding the business. These questions include:

  • How does this company operate?
  • What is its place in the industry as a whole?
  • Who are its competitors?
  • What are its long term prospects?
  • Does it bring something new to the portfolio of businesses you
    already own?

With such questions asked, you will most likely make the
right decision when buying into a company’s stock.

  • Make Plans For Panicky Times: Every now and then, investors are tempted to sell off their existing stocks, buy more, or buy other stocks. However, making decisions under duress may lead to the ultimate investment blunder, which is buying high and selling low.

A great tip here is to create a personal investment
journal. Write down what makes every stock in your portfolio worthy of holding on to. Also, with a clear head, write down the reasons why holding on to the stock in question could be a bad idea.

Ask yourself – Why am I buying?

List out all the things you like about the company as well as the potential opportunities you see in years to come. You need to have a set of clear, realistic expectations. What are the metrics that count, and what are the milestones you will use to determine the company’s progress?

When you have a well-detailed journal, you will be able to
detect the game-changers, as well as the potential setbacks. On the flip side,
you also need to ask yourself, What would
make me sell?

Sometimes, there are very good reasons to sell your stocks. In this part of your journal, write down exactly what those factors could be. I’m not just talking about stock price movement, especially in the short term, I’m talking about critical changes to the business that may hinder its ability to grow in the long term.

Here are a few examples of why you may consider selling
your stocks:

  • The company loses its biggest client.
  • The new C.E.O starts taking the business in a different direction.
  • A major competitor emerges.
  • Your investment thesis doesn’t pan out over a set period of time.
  • Build Up Positions Gradually. The course of time, and not a specific time, in particular, is what is key to reaping
    profits from stocks. The most successful investors purchase stocks because they expect to make profits over the years, or even decades.

These long term profits come by means of share price
appreciation and dividends. This naturally means you can take your time buying.

Below are 3 buying tips that reduce your exposure to price volatility Dollar-cost average:
Dollar-cost averaging means investing a set amount of money at regular intervals, weekly or monthly.

This set amount purchases more shares when the stock price goes down, and fewer shares when there is a rise in stock price. Overall, it
evens out the average price you pay. There’s a good number of online brokerage firms that allow investors to set up an automated investing schedule.

Buy in thirds: Similar to
Dollar-cost averaging, buying in thirds will help you dodge the heart-breaking
experiences of bad trading results.

Here’s how to buy in thirds:

Divide the amount you want to invest by. Pick three separate times to buy shares (this could be monthly, quarterly, or based on the company’s performance or events) For instance, you may purchase shares before a certain product is released, then invest the next third of your money into buying more shares if the product is doing well in the market. In the same vein, you can divert your money elsewhere if
the product flops.

Buy “the basket”: If you can’t figure out which company in
a particular industry will do best in the long term, then go ahead and buy stocks in each of them, yes, buy them all. Buying the basket will automatically mean you’ll be under no pressure to pick the best one.

This also means you won’t miss out on profits if one of the companies do well in the market. You can use the profit made from the thriving company to offset any losses from the failing companies. This technique will also help you identify which company is the best performing in that particular industry. With this knowledge, you can increase your investment in that company if you wish.

Avoid Trading Overactivity, Last but not least on my list of stock-buying tips is to avoid trading overactivity. Checking on your stocks every now and then is expected, but that can lead one to overreact to short term events. Such short term events include a change in share price due to factors like a war, a pandemic, or a recession. Many investors will make the mistake of focusing on those short term
events, instead of the actual value of the company itself.

This can prompt the investor to take uncalculated actions, even when none is required. If you notice that your stock experiences a sharp
price movement, be sure to first check what triggered the change before you make any trading decisions. It may be that the sudden change in share price is a result of market response to an unrelated event. It could also be that something significant has changed in the business model of the company.

Whatever it may be, be sure it is something that affects the long term prospects of your business before you trade. Ask yourself, realistically, are short term fracases like over-bloated newspaper headlines, or temporary price fluctuations relevant to how a well-selected company will perform in the long run?

How investors react to all the drama surrounding stock
pricing matters a lot. Remember the investment journal I spoke of earlier? You can refer to that in times like these, it will help you make guided decisions during the times of unavoidable price fluctuations.

How Investing Over Time Can Make You Rich.

Imagine if for over 5 years, you’ve been investing $10 every week, and you have an average return of 8%. By today, that particular investment would be worth thousands of Dollars. Here’s a real-life example. On the 13th of March 1986, Microsoft (which was a new company at the time), had its initial public offering (IPO).
At that time, you could buy a decent car for about $10,000, but what if you didn’t, what if you had bought $10,000 worth of Microsoft shares instead?

Well, let me tell you, according to CNBC calculations, if you had bought $10,000 worth of Microsoft shares in 1986, today (2020), it’ll
be worth $16million. You’d be rich. As far as finances go, there is nothing that can secure your long term future better than a solid long term investment.

Let’s go back to 1986, the time Microsoft went public. Let’s say you decided to split your $10,000 into buying into 10 different companies with $1,000 each, one of those companies being Microsoft. The other 9 companies pack up and are out of business. This would mean you’ve lost 90% of your investment right? Wrong! Microsoft still stands, and your $1,000 investment in 1986 would be worth $1.6 million today (2020), which is a whole lot more than your overall initial investment of $10,000. Keep in mind that I haven’t even added all the cash dividends you would have been receiving since 1986. See the power of a good investment over time?

Whether it’s a skyscraper you acquired in New York 30
years ago or shares from Coca-Cola you purchased around the same time, a portfolio filled with solid long term investments can withstand several failures over decades, while still giving you satisfactory returns, all thanks to compound interest. The problem with many investors is that they are afraid of holding out for the long term. Many who bought Microsoft’s initial shares didn’t hold on for 3 decades, they bailed out after their investment had doubled, and missed out on enormous future gains.

A small, short term fluctuation in share price and many investors would start to panic. Such panic is unnecessary, as it affects the investor’s ability to make wise decisions. Avoiding Wipeout risks is very important. As long as you can survive the occasional recessions, depressions, and liquidity crunches, and the company which you’ve invested in remains valuable both in the short and long run, then your investment is safe.

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