Information about investments is easy to find in the world we live in now. But this can be a huge problem all by itself. When you ask how to invest, where to invest, and what to look for, you can get a lot of different answers from many different places. The hard part is sorting through all of the noise to find the information you need.
So, where should you start if you want to put money into the stock market?
First, put your money into what you know. If you want to judge a business, you need to know how it works. People have often said that Warren Buffett made a mistake by not putting money into technology during the dot-com boom. He gave a simple answer. Stay away from a company if you don't know its business model, what it does on a daily basis, or how it makes money now and in the future. He has made billions of dollars every year for himself and his investors because of this.
Once you know what kinds of businesses to look for, you'll need to come up with ideas. You can get ideas from message boards, newsletters, financial news shows, and stock screeners. Stock screeners are especially helpful because, in addition to giving you ideas, they let you narrow your search as you go so that you only see stocks that meet your criteria. Using the screener at http://finance.yahoo.com has worked well for me.
Now that you've found some companies to look into, what should you do next?
Insider trading is when someone is thought to know a lot about a company and also has money invested in the company's stock. This could be a person with at least 10% of the company's shares, a director, the CEO, the CFO, etc. Keeping an eye on when and how much insiders buy and sell a stock can help you figure out what will happen to that stock. You don't want to buy a big piece of Company X when everyone in charge is leaving. So, it's a good idea to always keep an eye on what the "smart money" is doing.
- The price-to-earnings ratio (P/E ratio) is another useful tool for judging a company. The P/E ratio will tell you if the company is undervalued or overvalued compared to its earnings. If a company is undervalued, its P/E ratio should be lower than that of other stocks in its sector. This is a good number to put into a stock screener to find companies that make money.
Note that P/E can be changed (think Enron). Also, P/E ratios are very different from one sector to the next. The average P/E ratio for tech stocks could be 60, while the average P/E ratio for oil stocks could be 10. When I look at a stock's P/E, I don't compare it to all other companies. Instead, I compare it to companies in the same sector.
- Management team — Some people only look at a company's earnings, charts, and other technical information. This isn't always a bad thing, but if you want to know everything about a company, you should know who runs it. You should find out what other companies they worked for in the past and how well they did there. You should also know where they want to take the company you're evaluating and how long they think it will take to get there. It is kind of like judging a sports team. You wouldn't choose a winning team without looking at the coaches.
- Technical analysis and charts — This is another tool that can help you figure out where a company has been, where it is now, and where it is going. It shows the company as a graph, so you can see how the stock has been trading and how much it has been worth over time. There are many tutorials about this on the internet, and you can even get a free DVD from http://www.technitrader.com that shows you the basics.
These are a few ways to find companies to invest in. Still, do your research, write down your goals, and if you're not sure what to do, ask someone who has already done what you want to do for advice. Having knowledge is the key to success in almost everything.
