How do you do stocks?


Quick Answer

To succeed as an individual stock investor, it is critical to create a diversified portfolio and choose stocks with returns that beat inflation, according to Mitch Tuchman for Forbes. Morningstar notes that it is important to pick stocks that are priced low compared to their intrinsic value and to buy low and sell high.

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Full Answer

A diversified stock portfolio is critical because an investor who has his money in one or a small number of stocks risks devastating losses if a company he invests in fails or suffers major depreciation, explains Tuchman. When choosing stocks to buy, pick ones with prices that are unduly depressed, known as value investing. It is also important to factor dividends into your decision. The total return on a stock investment is the sum of its capital appreciation and dividends, minus taxes. This total return needs to beat inflation.

When a stock falls in price, it is generally a good time to buy it. Likewise, when a stock has risen sharply in value, it is generally a good time to sell it, notes Morningstar. Another key skill is recognizing the signs of a market top. Signals of a stock market top include large numbers of investors claiming the stock market is a sure thing and individuals who do not normally buy stocks getting into the market because of its recent rise in value. In deciding to make a stock purchase, consider the quality of the company and if it is a good value at market price.

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