Your Questions About How To Pick Stocks

Linda asks…

What the best company to open stock with?

im taking principle of bussiness and i have a projest to pick the best stock thats going to make the most amount of money??? can someone help me??

John answers:

Ask your professor if you’re allowed to take short positions…

If not, The student who takes the most risk will win the stock picking contest.

One student (or one group) will do something like tying up all of their money in something like Washington Mutual (WM) stock or bonds.

Why take the risk?

You’re not going to make much $$ by investing in a power company like Duke Energy (DUK).

While WM may ‘go bankrupt’, it may also sell for $5-6 per share or more. Also, WM’s share price swings wildly throughout the day – with a share price that moves up (or down) 25-30% in just a few hours.

In a market like ours, General Electric could go ‘bust’ next week. No company is insulated from the challenge of staying liquid in this environment.

Take risks and either win big, or lose big, but at least it’s funny money. Another risk/reward sector would be:

E-bay or Mercado Libre (

Learn what you can in this exercise because you’ll be doing it again in finance courses.

Steven asks…

What’s the maximum and minimum price you should pay for a stock?

To take a ridiculous example, Google currently costs $579.98 a share. There’s a lot of room for it to go down.

The majority of stocks of household names seem to fall between $45 to $100 a share.

There is also the strategy of buying junk or penny stocks where the price may be $1 a share, although that’s probably a sign of impending bankruptcy.

So what are some good maximum and minimum prices to buy?

John answers:

You cannot do stock purchases that way. Each stock has to be evaluated upon its merits no matter what the current share price.

You are somewhat limited by the size of your cash account…If you had only $50,000 to invest then I would not suggest you consider stocks like Google or Apple where you would be buying less than 100 shares and investing everything in that stock.

Personally….though I know it runs against the grain of most advisors here…my hunting ground so-to-speak is about 50% in the $0.25 – $5 range, 30% in the $5 – $20 range, 10% in the $20 – $35 and about 5% in the $35 -$50

But that is my personal preferences and by no means is this a standard practice….just what I feel comfortable with.

Not all penny stocks are junk or headed for bankruptcy….just as not all stocks in the $20-$50 range are quality (USA banks come to mind among others)

You cannot pick stocks randomly based on price. You must develop the skills necessary to evaluate a stock to see its merit relative to others in its industry and price range….bargains exist at all levels…you just have to find them.

Laura asks…

Will sales of tinfoil, canned goods and ammo skyrocket when Romney loses?

Time to pick some stocks!

John answers:

And GOLD.. Oh… Gold…

But if Romney wins… All those people who bought Gold under Obama will watch it tank as they all dump it… “we’ve got to invest in the stock market, it’s going to be soaring now!”

meanwhile, I’ll buy it when it tanks… And hold it until the next dem wins and Fox drives the price through the roof… Then sell for a nice little retirement

Thomas asks…

What is a good stock to invest in?

For my stock market project, we had to pick 3 stocks to invest $10,000 in (not with real money obviously). I chose AAPL (woops), SBUX, and I need one more. For each stock we chose, we need 5 articles with good reasons to back up the purchase. So if someone can give me a few good stocks to consider + articles with good reasons, that would be great. The project is due tomorrow, so I’m going to just say I purchased the stock in the beginning of November.

PS – Articles can not be from before August.
Well because I didn’t cheat on Apple, I actually “purchased” that one on October 23. Good capital gains won’t get me a better grade, I just need valid reasons for choosing the stocks I did. I know that Starbucks is a very admirable business that excels in many areas – I just need some articles to back that up.

John answers:

If the amount of gain or loss does not affect the grade, you can select any 3 stocks of you choosing and use Seeking Alpha as your source for the most recent articles and good reasoning as to why or why not to invest in it.


George asks…

What does a hedge fund being “leveraged” mean?

When a hedge fund is highly leveraged does it mean the manager is using money from his investors to pick stocks and what not? Does this have anything to do with a fund’s net exposure?

John answers:

“Leveraged” means that the hedge fund is borrowing money (usually from its Prime Broker) to invest multiples of its actual capital. It multiples returns if things go well, multiples losses if not.

In the UK, they use the term “gearing” for the same concept.

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