Risk is the stock market's way of ensuring that you will lose money. So don't let the negative headlines fool you, but the market as a whole is on a bull run. Keep that in mind while considering how much risk to take on.
If you had a small amount of money and wanted to gamble it away in the stock market, you could place your bets on some combination of large companies, small companies, bonds, stocks or another type of investment. You would be taking on much more risk than buying a thousand shares of Wal-Mart, but the chances of making a killing in a very risky way are pretty good.
That's the power of risk: It forces you to take on more money.
The same principles are at work when you choose your stocks. A small company might be very solid, but you could just as easily pick a big company and watch the stock go up 100% over the next year. The market is just too volatile, and if you buy stocks that way, you're taking on far too much risk. Don't buy into rumors or tips about a company you're considering. Do your homework, don't believe anyone when he says the company is going to be the next Apple, Google or Wal-Mart. The risk is much higher when you buy those kinds of stocks.
To be sure, even if you're willing to take on more risk, you can do a lot worse than investing in small companies. They often go up in value in a very short time. Just don't get so caught up in their recent success that you don't look at their potential for future growth, too. That could be just as explosive.
When you choose your stocks, you also have to take into account the fact that the market is looking for something in the next few months. So try to decide if your company is positioned to grow quickly enough for the market to feel positive about its potential. In most cases, the market will correct itself in the next few months and give you what you ask for. Just keep your eye on the prize. Don't get too far behind the curve.
To be sure, choosing your company is a process. The market will give you advice, but don't always follow it. The market can be wrong, but it's not always wrong about which company will be a leader in its field. Be sure to see what the company does and doesn't do well, and also compare it to other companies in its field.
Always look for great ideas. It's not necessary that every idea you come up with will be a winner. Take a look at all the possibilities and narrow down your list of candidates. Don't just go for the company with the most money, or the one that has the most patents. Look at their financial health and management strength, as well as how well they're doing on the market in general. Go for the company that seems like a new idea to people, not because they have it... (we all know that's not always the case). Always think outside the box. Make sure you're choosing an area that you understand, or understand a lot about. Always looking to make a profit, but be sure that you are choosing a company that is well situated to do so. Always go for the low hanging fruit.
Look at the industry. Know what problems other companies in the same field have, and compare them side by side to see how well they're doing. Make sure the competitors are doing well, too. A company that is under performing is a prime candidate for buying. Don't just buy a company because you hear about it, or because you might someday. Look what the company has done, and take a look at what it is going to do in the future. Always know what you're getting into. A stock that is doing well in a small market might not be going so well in a bigger one, or maybe it's not going so well in a smaller one either. In general, make sure the market is doing well.
Now you know that you need to look at the company, what problems they are having, and the industry that the company belongs to. You also need to make sure that you understand and know what the company is doing, and where it is going. The very next step is to look at the current price. How is the price in the stock market? Is it on a upslope, or downslope, or stable, or going down? A company that is consistently doing well will have a stable price, while a company that is consistently doing poorly will have a downslope. And a company that is consistently doing bad will have a steep price decline. Keep an eye out for these trends. This is important.
The next step is to look at the dividend... or NOT to. Many people have a misconception that a dividend implies that the company makes money. That is not true. They might make money, but only very small amounts. That is NOT the objective. The objective is to keep your money safe. Therefore, stay away from the dividends.
Follow the price. Always, ALWAYS, ALWAYS look to the price of the stock. Does it look cheap? Or is it expensive? Is it on a steep upslope, or steep downslope? Is it stable, or trending downward?
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