Finance

How to decide when to buy a stock

If you are a new player in the stock exchange and want to make some good money by investing in shares then this guide is for you. This article will try to establish a strategy on how to decide when to buy a stock.

Keeping track of the markets

Investing in shares has always been a game in which information always had the most important role, so the first thing you should do before you invest in shares is to do some research. Don't rely on stock exchange specialized press to find opportunities.

The true huge deals can be found in the traditional media. Watch the news and try to connect the dots. For example let's take outsourcing; if in a specific market a player has begun the construction of a factory in a foreign, undeveloped country their profits will know a sharp increase. The key is to get this information as soon as possible, so keep your eyes on foreign media if you can.

Avoid risky investments

If you are relatively new to investing, you should always opt to buy shares in companies that are both big and considered "safe" and usually perform in line with the wider market. This is to discourage any risky investments. Smaller companies are much more volatile and should be avoided for anyone new to buying shares.

Company developments

Always try to keep abreast of any company developments that are taking place. If for example, a company develops a product that is either unique or superior to anything their competitors have to offer it will give the company a competitive advantage over rivals, this is likely have a positive impact on the share price.

Company Innovation

Another type of information that is worth monitoring is the scientific press. Watch out for companies developing new technologies. These will be the giants of tomorrow. Investing in shares like these is a good strategy especially if it has the backup of acquired patents.

High tech companies are especially suited for this type of investment. An example is Apple Computers Corporation. Their strategy of innovative products such as the Ipod, has had a prolonged and sustained influence on their share price. The idea from an investors point of view is to buy into the stock very early to take advantage of the appreciation in the share price.

Investing blue chips

Don't always rely though on the tomorrow's players. Buy blue chip shares whenever possible. The key is to make a balance between risk and profitability. Be careful though when investing in established companies that they have a sound development program for future products.

Another type of strategy involves the monitoring of the open source companies. Typically these are started by enthusiasts and then develop slowly into commercial ventures. When the critical moment arrives and shares are available to buy, invest in them without taking a second look. The reason is very simple.

Most of the time a great deal of users will continue to use that product, the problem is that not for long. These shares will typically have a sharp rise in price at the beginning and then a slow decrease in price. When thay start lowering, don't hesitate to sell.

Research the fundamentals

When you invest a company, you should also look at the fundamental aspects of the company i.e. their financial figures. It is easy and often free to obtain a track record of a company's financial data. You should look to see if a company has a history of producing like for like growth in their revenue which should meet or even exceed the sector average and whether this has been translating into an increase in like for like profit. If not, you should investigate why it isn't the case.

Perhaps, the company is reinvesting their profits back into the business. In any case, a business should try and deliver increasing like for like revenue and profit year on year.

Diversify portfolio

You must be aware though that at any given moment your shares' price could go down due to some unexpected reasons. The cornerstone of your investing strategy should be balance. Never put all the eggs in the same basket and always be sure that you invest also in companies that show a proved and healthy dividend that is rising year on year. Having said that, a company with a track record of innovation should and most of the time do ride out periods of flactuation in share price. It's the long term trend that is important and not the short term volatility.

With these tips in mind you should have a fairly good idea how to decide when to buy a stock. Of course, with more research you should be able to become an expert stock picker.

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