Your Questions About How To Pick Stocks To Buy

Donald asks…

What is the stock market and how do people become rich off of it?

I’ve heard a lot about the stock market recently but I don’t know much about it. What is it? Also, I’ve heard that people have gotten rich off of it, how did they get rich?

John answers:

This is a very complicated question so I am going to over simplify it. The Stock market is a “place” (I say place even though it is not really a place) where people can buy or sell stock. Stock is ownership of a company. To get rich of the stock market there are two ways to invest in the stock market that i will call traditional and gambling. In traditional you assume that the market will go up and down but in the long run it will go up and it will go up quite a bit and if you invest in such a way that allows you to invest in the whole market you will make some pretty good returns. In gambling (which may be a bad name for it) you pick a few stocks that you think will go up big over a short amount of time then what you can do is buy what are called “call option” which will allow you to use a little bit of money to make a lot of money but only if the stock you pick goes up a certain amount in a given amount of time. However if the call doesn’t go up you loose your investment…a lot like gambling. But people have made fortunes taking just those risks. Hope i didn’t confuse you.

Lisa asks…

I’m playing the stock market game for economics. How do I know which stocks I should buy?

Any suggestions? What factors about the companies contribute to how well their stocks are performing. I’m kind of new to the whole idea.

John answers:

Typically you want to look at earning growth, financial reports, competitors, and all sorts of other things.
If this is just for the semester, then a lot of luck is really involved for short-term investing. So I would pick something that already has some upward momentum in order to try an achieve some short-term gains.

If you are allowed to buy ETFs – Exchange Traded Funds – (I don’t see why you wouldn’t be), then I’ll recommend:
>>> EEM – iShares MSCI Emerg Mkts Index
>>> IXG – iShares S&P Global Financials
Instead of just one, they are a basket of stocks specific to a particular area of the market. It reduces the risk of buying just one stock. These have performed well and will probably keep going up in the short-term.

If you need stocks, then I’ll recommend:
>>> AEOS – American Eagle Outfitters Inc.
>>> ANF – Abercrombie & Fitch Co.
I’m sure you’ve seen them both in the mall. They are both doing quite well, Christmas spending season is coming, and consumer confidence has increased recently. Also, retailers’ sales keep beating forecasts.

That is just my two cents. I am not an expert, but I know more than the average bear.
Since this is just a game for fun (and not graded I assume), pick companies you know because it will be more enjoyable to follow their stock prices.

.

Chris asks…

How do you trade stocks online, what sites can you use?

I just want to buy and sell stocks, when I want, and buy what I want. Just a beginner, anyone have any tips?

John answers:

I use Scottrade.com – they offer $7 online trades. If you are looking for investment ideas, you can see what the best investors are buying and selling at http://www.top10traders.com – this is a free site that lets you create a portfolio of stocks with $100,000 in “play” money. Each day the site ranks the best performing portfolios, so you can see how your picks perform compared to other investors. You can read posts on investing from the best traders, as well as share your own investing ideas. There is a charting feature, so you can see how your portfolio performs compared to the S&P 500. Also, you can create your own “group” so that you can see how you are doing compared to your friends.

Here are this month’s best traders:

http://www.top10traders.com/Top10Standings.aspx

Good luck.

Mandy asks…

How many shares is a good amount to buy?

I am interested in knowing what is a good number of shares anyone should buy in a company. I am looking for a guide in order to make a better educated guess per company I invest in. Hence, would 10 or 20 shares for Company X be a good number? Let’s assume the comapny is viable, financially sound and historically shows steady gains.

John answers:

The question should not be how many shares, but how much capital. Ten shares of a $100 stock is different that ten shares of a $10 stock.

What you want to do is take determine how much capital you have available for investing. If it is limited, you will likely be limited to buying stock in just one company. As the capital grows you’ll invest in two companies, and then three, and so on until you have a reasonably diversified portfolio.

What’s critically important is that you protect whatever capital you do have from loss. Consider using a stop loss order that automatically takes you out of a stock position if it falls in value by more than several percentage points from the price at which you bought.

I recommend picking up a copy of “How To Make Money In Stocks” by William J. O’Niel, who is the founder of Investor’s Business Daily.

Good luck!

Helen asks…

Can I set a limit order to buy and a limit order to sell at the same time?

Lets say I want to buy 100 shares of XYZ which is currently running at $20/share.
Can I set a buy order (100 shares) of XYZ at the limit of $19, and the after set a sell order of 100 shares of XYZ at $22?
Can this be done?

Also any helpful tips or tricks are appreciated!

John answers:

Yes, you can actually go a little further….you use a OCO (one cancels the other) trade set up.

Here is what I would recommend. I do it all the time

Buy Limit at $19.00 Buy Day
Sell Stop Limit at $17.00. Good till cancelled. If you buy and the stock drops to $17.00 you get sold out, to protect against additional losses.
Sell Stop Limit at $22.00 Good till cancelled. If stock goes up to $22.00 you automatically sell and your other sell order is cancelled.

Now, I would usually sell using a trailing stop of $0.25 at $22.00 in lieu of a stop limit. The trailing stop allows the stock to continue to increase over the $22.00 ….it could go up to $23. As long as the stock does not decline $0.26 I continue making money. If it goes to $22.60 then drops back $0.25 the stock sells at $2.35. I pick up another $0.35. BUT if it hits $22.00 then drops back $.0.24 I am still in the trade, then continues to the $22.60 I have made more money. If it hits $21.75 I am stopped out, and lost $0.25. Lets say the stock is at $22.15 and you get nervous. You cancel out your existing orders, and place an order to sell at a limit price or current market price.

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