10 Ways to Increase Your Odds and Make Money in Stocks
Here is a list that, when followed, will greatly increase your odds at picking those winning stocks.
When all of the following criteria is met, along with all of the other concepts you will learn on this website, you will be in a much better position to take advantage of the many great opportunities that exist within the stock market each day.
This is all just a summary of the wealth of information described in all of the investment books written by the greatest traders of all time.
Those books can be found to the left, or at http://www.investyourbest.com/stock_market_resources.html
Good luck, and study hard.
Lets get started...
#1
Stop buying cheap stocks.
When a stock is cheap, it is cheap for a reason. You are not getting a discount. If the stock was a strong, high quality stock that is in demand, then don't you think everybody else would buy it and therefore increase its price? There are only a few unique situations in which a cheap stock is actually a discount, and that is after a bear market when everything has taken a big hit (but even still, just because the stock performed well in previous years does not mean it will do well again in the future), and when a well performing stock makes a normal correction during base building stages. Think of building your portfolio as you would build a sports team: would you want to build a sports team full of the cheapest, lowest quality players you can find? Or would you want to build a sports team full of the more expensive, but high quality players capable of actually winning? The answer is obvious, right? I hope so. Another point to consider: with wall street firms being responsible for the majority of trading volume on any given day, keep in mind that the pros will not invest in cheap or inexpensive stocks. So don't get all excited about a $5 stock - stay away if you are serious about investing. All of the institutions with billions of dollars are not going to put all that money into cheap, low quality stocks. Also, make sure your stock has a decent amount of daily trading volume (at least 300,000 - 500,000 shares traded per day). If your stock has a low amount of daily volume, then a single hit on the stock can wipe it out. Think of it this way: if a million people own a stock and one person sells, then it will have no effect. However, if only 5 people own a stock and one person sells then that is a HUGE deal. This of course is an extreme example, but the point is still clear - if not enough people trade a certain stock then a single hit can wipe you out. The opposite is also something to think about, if a stock has 50 million shares traded per day then there is way too many shares going around and it will be hard to see a healthy price increase due to supply and demand. If there is plenty of supply floating around then the demand can't grow too strong.
#2
Only buy quality stocks.
This does NOT mean to buy only Microsoft, AT&T, Best Buy, etc. In fact, I personally wouldn't purchase any of those stocks. Those stocks have already seen their best days, they may still be leaders in the eyes of consumers, but that doesn't mean they are the leaders of the stock market. Everybody already knows who AT&T is and what they do; its not like in a month everybody is going to start flocking to AT&T stock and send their stock soaring through the roof like AOL did in the 90's. AT&T is old. This of course depends upon your investment style though; if you are a slow income investor then you might like AT&T's dividend to slowly build wealth over a LONG period of time. However, if you are looking to increase your portfolio by 25-50% over the next year then stay away from the big and old companies like AT&T. So then what do I mean by "quality stocks?" There are many factors to consider, both fundamental and technical. You want a stock with increasing sales, increasing earnings per share, a good relative price strength (which measures a stocks performance versus the rest of the market), leaders in their group and sector, and many others. There is actually no need for you to do the painstaking research into all of these factors because there is a website that already does this for you. IBD (http://IBD.InvestYourBest.com) provides you with all of the information you will ever need to know about any stock. The online research tools, stock screens, and ratings help you pick the quality stocks and give you a detailed account on sales, earnings per share, relative price, group and sector rankings, and provide you with stock charts to check out price action. Their online newspaper actually provides you with a bunch of stocks that are currently breaking out of strong bases and preparing to increase in price. They do a great job of showing you where all of the demand is and what the billion dollar Wall Street funds are investing in (because as you know, those firms are what REALLY push a stocks price up).
The best book to read for more about picking the highest quality stocks is:
#3
Only buy stocks coming off solid bases.
If I had to declare the single most important aspect of buying stock, besides the obvious choice of the stock's overall quality, I would say that you need to find stocks that are creating solid bases after very healthy performance.
If you don't know what a base is, then read: http://www.investyourbest.com/what_is_a_stock_base.html
Again, in order to find the high quality stocks that are experiencing healthy price action and are in demand, then check out all the tools at IBD. The online newspaper also gives you stocks that not only have been very strong recently, but are also building solid bases as they prepare for their next launch. If you DON'T buy stocks that are coming off solid bases, then you are exposing yourself to a much greater amount of risk. If the stock's recent action has been up and down then you don't know what is coming next - if you choose a stock in a base then it is much more predictable. It is also MUCH safer to buy a stock as it is coming off a solid base than it is to buy a stock in the middle of a bunch of action. If you buy in the middle of all the action then you are more prone to being scared out of a stock as it makes a normal correction, even if the overall direction of the stock is still healthy. This leads to number 4...
#4
Don't buy too long after a breakout.
Simply put, if you buy too long after a stock breaks out, then when the stock makes its normal correction you might lose money and get scared out of the stock. This will not only cause you a loss, but it will hit you again as you are on the sidelines as the stock decides to resume its overall trend and climb back up. Then once you see the stock climb back up, you might be tempted to jump back in, but if you are too late then the same thing might happen again. This is why it is so important to catch a stock as it first launches off of its base. Not only will you make more money in the stock, but you will also have a good enough profit to be sure that you will not lose money during the next normal correction and be scared out of the stock. You will be in a better position to profit even more in the next rally. Of course the question is: how do you catch a stock RIGHT as it breaks out? The answer is again: IBD. The online newspaper provides you with plenty of stocks that are currently building bases, or launch points, after healthy price action. All you have to do is sit and wait - so don't miss the next one.
#5
Only pick stocks within the top industry groups.
Industry groups are more specific groups within an overall sector. So if a sector might be something such as "media" then an industry group would be something even more specific within the "media" sector such as "television" or "radio." Picking a stock within the top industry groups will automatically put you ahead of the game. For example, if there are a 100 industry groups and you choose stocks only out of the top 10 groups, then you can basically say you are picking stocks out of the top 10% of all stocks. This really puts you at an advantage, but number 6 extends this theory to the next step to REALLY put you at an advantage. IBD actually provides a directory that ranks every industry group and every stock within that industry group to allow you to pick the winning stocks from the winning groups. Talk about increasing your odds... ;)
#6
Only buy the leading stocks within the top industry groups.
If you are only buying stocks within the top industry groups then you are already reaching into the bag with the most possible prizes. Now, boost your odds even more by only buying the leading stocks within the leading industry groups. For example, if you pick any decent stock out of the very best performing industry group then you are at least possibly holding a good quality stock. However, if you pick the very best stock out of the very best group then you have given yourself the highest possible odds for making money in the stock market.
#7
Buy stocks with strong performing "sister stocks."
If number 5 and 6 together haven't already gotten you excited to go start screening through stocks, then this will be the icing on your cake. Sometimes the best performing stock within the best performing industry groups will be a "leading loner." This means that other stocks in the group might just be "riding along with the leader." To be sure you are REALLY picking good stocks, buy the best performing stocks within the best performing industry groups, but make sure there are also other stocks within its group that are also performing well. Investors might hesitate to buy a strong performer if the rest of its group isn't doing very well. With that being said, that best performing stock should be even stronger with the support from other strong stocks within its group.
#8
Buy stocks that are gaining institutional sponsorship.
This means that a stock is being heavily bought by Wall Street institutions. Those institutions are the ones with billions of dollars and can really make a stock move. Due to their enormous size, it can take an institution weeks or even months worth of buying a stock before they have finished buying the amount they wish to buy. Since you are a smaller individual investor, you can jump right in and watch your stock increase in price as these institutions purchase millions of dollars worth of stock over the next few weeks or months. Best of all, once the price run is coming to an end you can jump right out with your profits. You just rode the wave.
#9
Follow the overall market trend; don't fight against the wind!
This is simple. Don't buy a long position in the middle of a bear market, and don't sell short in the middle of a bull market. Go with the overall trend. If the overall market is going up, then the overall outlook is positive - don't fight against it. If the overall market is going down, then the overall outlook is negative - don't fight it. The best way to go in the stock market is with the wind to your back!
#10
Learn all that you possibly can about the stock market.
This should really be #1, but as you will see by the end of this paragraph, we put it last for a very good reason. Ignorance is a sure way to lose money in the stock market. You might make a good move by chance every now and then, but you will never consistently make money in the stock market if you don't understand how it works. Luckily for us, the stock market has been around for well over 100 years so the generations before us have been able to unlock the mysteries and share their secrets with us. The stock market is an amazing wealth building tool, but sadly, the average human being seems to believe that they don't need to read any books to make money in the market. They are all just out to get rich quick and just lose their money. The funny thing is, when they lose money, someone else has to make money. Do you know who the people are that make the money that is lost by others? You. People like you that actually take the time to do their research and learn all that they possibly can. If you just read through all of these ways to increase your odds, and you're still here for #10 then you passed the test; you are obviously one of the individuals gifted with common sense and a realistic outlook on things. All of the other people stopped half way through and went and tried to get rich quick, but you stayed and obviously have a huge advantage over them: knowledge. Good job. Now expand your knowledge even more by exploring the strategies developed by the greatest stock traders of all time. They have taken all of their knowledge acquired over a lifetime of making money in the stock market and passed that knowledge on to you and I through their books. These books are by far the best investment you will ever make in your life as just a few weeks or months of reading will supply you with the secrets of the stock market that will last you a lifetime. That amazing wealth building tool called the stock market is open 7 hours per day for the rest of your life. Read the books on the left, and go master it.
And that, my fellow investor, is how you will make money in stocks.