Stocks Investment

How to Buy Stocks

Stock tips spill from everywhere: on television, at parties, in the gym. E-mail boxes are full of pitches for can't-miss moneymakers to buy right now. Even your own scouting efforts spot stocks whose solid growth seems like solid gold. Pick a stock, and someone out there will be able to spin a story about why it's attractive.

What to Watch For:

Stocks need a catalyst, a spark to get them moving. Maybe it's a new product, a management change or gaining market leadership. Being in a hot sector helps, but don't count on a rising tide to lift all prices. A company in a good industry isn't necessarily a good stock, it pays to do homework.

Professional investors follow myriad sleuthing methods, from computerized screening programs to gumshoe field work. For both custom and ready-made screens, try Web sites like www.Morningstar.com

Here are two buying tips from the pros:

Compare a stock's price to its expected earnings-growth rate. The price-to-earnings-growth ratio, or "PEG," should be at or close to 1.0.

For example, a stock at 30 times earnings may seem overpriced if the average company in the industry commands a price-to-earnings ratio, or "P/E," of 20. But if analysts expect 30% earnings growth for the company over the next year, a PEG ratio of 1.0 is eye-catching.

Also, study the corporate balance sheet, a financial summary that comes along with the cash-flow and income statements which reflects the quality of earnings. These documents tell you whether management makes, spends and invests shareholders' money wisely. Company Web sites should post quarterly reports and annual reports, or the Securities and Exchange Commission Web site, at www.sec.gov, offers these and other informative disclosures.

Overpriced Goods

Cost matters. Purchase price, more than the selling price, determines return on investment. Be cautious about highfliers that may be closer to the end of their runs than the beginning. The market probably knows it's a top seller and has bid up the stock accordingly.

You could invest in the best company, but if you're overpaying for it, you could end up losing money because the stock price already reflects the reason you're buying the stock

Hunches and Headlines

Good companies aren't always good stocks, and basing decisions on hunches and headlines is not an investment strategy.

It is frustrating to watch people make significant investment decisions based solely on one or two sentences of hype. You get what you pay for, and if you're relying on 'free' research and online chat rooms and your next-door neighbour, that's a big mistake.

Leave impulse buying for the supermarket and out of the stock market. Have patience. Time gives individuals a rare edge over short-term-minded institutions and hedge funds, which tend to trade frequently. Longer investment horizons smooth the ride down Wall Street and make market losses less likely. The most successful investors buy stocks at attractive valuations and hold them for long periods. It's time, not timing, that is the secret to success.

'Pump and Dump' Scams

As the old saying goes: Look around the poker table; if you can't see the patsy, you're it. With stocks, the players at the table are Internet chat rooms and bulletin boards, "spam" e-mail, investment newsletters, and even television and radio.

What ever the delivery method, the classic "pump and dump" contains the same message: Buy this stock now, before everyone learns about the firm's newest widget. The stock usually is thinly traded on the less-policed over-the-counter market, also called the Pink Sheets.

If you and others like you buy into such a pitch, your demand will only boost the stock price, turning a tidy profit for those who bought in earlier than you -- often the very folks pumping the stock -- who then sell, tanking the shares and leaving newcomers with big losses.

Don't take the bait. It's tough to be skeptical when you're told what you want to hear, but doing otherwise puts you at risk of being separated from your money by fraudulent promoters. You always have to wonder why someone is selling the stock when you're buying it.

Love-struck Stocks

Falling in love with a stock can bring reward, satisfaction and visions of a long-term relationship. Trouble is, a stock won't love you back. If shares head south, you have to be ready to break it off and sell.

Stay disciplined and diversified. Having at least 20 to 25 stocks should be the minimum to remain diversified,

Climbing on Bandwagons

Many people buy stocks but aren't stock investors. They want the stock that will make them both rich and smart. In fact, the next Microsoft or Google is out there; it's just unlikely you'll find it first.

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