How to Evaluate a Stock before you Buy

To make money in the stock market I’ve always tried to follow three basic rules. The first and most obvious is buy low, sell high. The next is to use common sense. And finally, don’t get greedy.

Before I elaborate, let me just establish my credentials. I am not a professional money manager, and I do not get involved in day trading. I am simply a private investor who has done quite well in the stock market over the times I’ve gotten involved in it, and I don’t mind sharing my knowledge with others. I do not consider myself a speculator, but rather an investor who’s interested in helping to support the economy where I live, and to benefit from it financially.

The kinds of stocks I prefer to invest in are the ones I know something about. This is where the common sense comes in. Having a background in architecture I know something about the construction industry. Some years back when North America was building furiously I invested in several real estate development companies and did quite well. Today there are still places where things are booming and by doing a little bit of research, investors can discover which contractors and developers are involved. It’s not rocket science, just common sense that will tell you that the companies that seem to be well organized will do better than the ones that aren’t. If they are listed on the stock exchanges, they’re worth checking out. If they are already on the high side, you may want to think twice, but if they are younger companies that are still a little undervalued, they may be worth taking a chance on.

Like everyone, I don’t know about all sectors of the economy, but I can use my common sense to determine whether certain companies have the potential for growth in their field and whether they are stable enough to invest in. Personally I shy away from penny stocks and companies that are playing the high stakes games. These are companies you can make a lot of money on, but lose a lot on as well. I’d rather stick to the stable companies that already have some kind of track record. This is where the third rule of not being greedy pays off in the long run.

Common sense seems to be a factor in the investment field that is highly under-rated. When I think about it, the only time I really lost in the stock market was when I did not pay attention to this. I knew of a friend who made a lot of money investing in a small Internet company and so I thought I’d do the same. I purchased shares in the same company that did so well for him, but in the process I broke my second and third rules. Although the company’s shares were at a low level at the time, it never recovered and I lost my money as I went down with the ship. Common sense told me that the company did not have any real assets, but greed drove me to invest in it. I learned the hard way to stick to my rules.

If anyone wants to make good money in the stock market, the opportunities still appear to be there. As long as there are people needing to be fed, clothed, housed, and transported from place to place (as well as entertained), there will be opportunities to invest in the companies that are involved in various aspects of these. By making wise longer term investments and not jumping in and out each time a negative bit of news hits the airwaves, people can get either a good or very good return on their stock investments. It still beats interest rates at the banks, and even the returns on mutual funds if one invests prudently.

I’m a firm believer in knowing where my money goes, so I’d sooner invest in individual companies than in mutual funds. Some may say this is riskier, but when you think about it, by investing in individual companies you’re doing the same that mutual company investors do as well. If you apply common sense to your investments, there’s no reason you shouldn’t do as well or better than them because you don’t have the same overhead that they do.

Finally, let me just say that if anyone is investing in individual stocks, it is good to buy a reasonable number of shares that will see a good proportional return on investment once the buying and selling commissions are factored into the equation. Beyond that, all I can say is have fun investing!