Your Questions About How To Pick Stocks To Buy

Nancy asks…

How many of you have made 20% gains in stocks in Aug 2011?

I mean stocks not options and commodities. I mean plain good old stocks ?

I mean bought and sold in Aug 2011 ?

John answers:

Well I didn’t. You simply needed some luck and pick the right stocks, but probably 99% of investors did not do that well.

Jenny asks…

What are the best stocks to buy?

I am a gambler and i believe unless they are under 30 cents a share it is not a gamble does any one know of any stocks to buy.
I invest in the volume of 100,000 shares at a time is my plan. If some one could prove they are worthy they could work in my office i am getting ready to build.

John answers:

My plan with penny stocks are buy, hold and wait for pop … I don’t consider these picks as investments as they are more like lotto tickets.

Every year I get one or two that will go up 1000% but they might have done nothing for 2 years …

Pennies are the reason my Ameritrade account is still open … They don’t charge extra for low price stock, OTCBB or high volume trades.

Ruth asks…

What is the smallest number of shares when you buy a stock?

What is the smallest number of shares when you buy a stock? Is there even a limit?

John answers:

While you *can* buy a single share, most of the time you wouldn’t want to.

New investors have to be especailly careful of commissions. Most on-line brokers charge $7-10/trade (not per share). Most stocks trade in the $10-50 range. Let’s pick a $35 stock.

You buy 1 share/month:
total cost: 12*($35+$7) = $504 for 12 shares
cost basis = $504/12 = $42/share
Stock must go up 20% to break even!

Plan B:
Save money for 12 months, then buy at once:
total cost: 12*$35 + $7 = $427 for 12 shares
cost basis = $427/12 = $35.58/share
Stock must go up 1.7% to break even

Moral of the story: save your money until you can buy more shares in blocks so that the commission is small (<2% of cost).

$7/trade: $7/0.02 = $350 min/trade
$10/trade: $10/0.02 = $500 min/trade

Linda asks…

How to buy stocks at the stock market? What are the requirements? What is the process?

I want to invest on the stock market but i don’t know how it works and what is needed. I want to know the process. thanks.

John answers:

This is just the process for opening an account and starting to trade stocks. Learning which stocks to trade can take years, and is way to complicated to try to explain here:

To open an account, go to a brokerage firm (like Schwab, Etrade, Scottrade; whoever) and get a form to open an account, or you could just download the form from the internet.

Fill out the form, and send it to the brokerage firm (or you can drop it off at the brokerage firm).

Wait for the firm to open an account for you, it won’t take long and they’ll send you the info when its open or you could call/ drop by their office.

Now start trading. You would typically trade by calling the firm and telling them what to buy/ sell, or doing it over the internet.

This is a very very general explanation, but there are about 100 details you will need to decide for yourself along the way. Ie what kind of account; are you rolling an ira or something into the new account (the brokerage firm will handle this, you just fill out another form); do you want a full service broker (more expensive but gives you more advice on what to buy) discount broker (less expensive, some advice) or deep discount broker (cheap, but you are on your own in terms of what to buy); and many other details.

Of course the brokerage can help you with most of the details, but they can’t teach you how to choose which stocks to buy/ sell (and quite frankly the picks given by the full service brokers may not be any better than throwing darts at a newspaper); this part takes years of trial and error to figure out – so hey, get going. No time like the present to start.

Good luck.

Joseph asks…

Can anyone tell me the difference between Equity, Option trades and Margin rates?

I am really new to stock and shares.
I would like to get started and would like to know how to go about it.
I would also like to know a reliable place to look for which stocks we can buy and in what quantity.
What is the cheapest and best way to trade stocks
I am really new to this and would like any guidance and help.

John answers:

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The basic idea of equity is ownership. For example, if you have a $200,000 house with a $125,000 balance on your mortgage, you own $75,000 worth of the house and the mortgage holder owns $125,000 worth of the house. You have $75,000 equity in the house.

Shares of stock are sometimes called equities because each share represents ownership of a very small percentage of the company.

For a slightly more comprehensive definition see

http://www.investopedia.com/terms/e/equity.asp

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An options trade occurs when a buyer and a seller agree on a premium for an options contract, and the buyer pays that premium to the seller.

For an explanation of what an options contract is, see the first tutorial at

http://www.cboe.com/LearnCenter/Tutorials.aspx

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The term “margin rate” could be used in different ways in different contexts.

First you need to understand what margin is. Margin is contents of your account that can be used as collateral. If Jane has an account that contains nothing but $50,000 in cash, she has $50,000 margin available. Similarly, if John has an account that contains nothing but 1,000 shares of a stock trading at $50 per share, he also has $50,000 margin available.

If you borrow cash against your margin balance, you will be charged interest on that loan. The interest rate may be called the margin interest rate or simply the margin rate.

There are also margin requirements for different types of short sales. For example, to sell a stock short you need margin available equal to at least 50% of the sale proceeds. That 50% figure is usually called the “margin requirement” but you could also say the margin rate for a short stock sale is 50%.

Margin is also used to indicate the difference between a product’s (or service’s) selling price and the cost of production. So if it costs a company $200 to build something it sells for $210, it has a profit margin of $10. Since $10 is 5% of $200 the margin rate would be 5%.

For a slightly longer discussion on margin see

http://www.investopedia.com/terms/m/margin.asp

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Learn before you trade. Remember you can participate in the stock market by buying mutual funds and let professionals choose which stocks to buy and sell. You do not have to make those decisions yourself.

If you do decide you want to learn how to pick and trade stocks, you can start with something like the “Fool School” at the Motley Fool site.

Http://www.fool.com/school/basics/basics.htm?source=ifltnvpnv0000001

Warning: If you go to a number of eductaional to learn trading, you will discover that they sometimes disagree with each other. This does not mean one is correct and the other is wrong. It means the two sites are using different techniques to try to make a profit.

There is no standard formula upon which everyone agrees when investing. One technique will work better at some times, but not as well at others.

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I do not believe any such site exists. If it was that simple no one would lose money in the stock market.

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Read the section in the Fool School on choosing a broker.

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