Investing: Picking Stocks and Planning Trades

So you're ready to take the plunge and purchase some stock. But how do you choose which stock to buy? There are lots of theories, but no foolproof methods. However, there are a few things you can do to make smarter investments.

Investors can usually be categorized as either growth investors, value investors or dividend investors - and you should decide what kind of investor you might be. If you're the optimistic type, growth investing might be for you. If you have a lot of patience, you may want to consider value investing. Interested in a little extra income in the near future? You might be drawn to dividend investing.

Growth Investing

Many investors follow a growth investing strategy, which means they look for companies who are likely to grow their sales and earnings. It naturally follows that stock prices generally reflect how profitable investors think a company will be in the future. Stocks that are expected to increase their sales and income by at least 15% from one year to the next are good candidates for growth stocks. This is usually the best path for beginning investors to take.

Value Investing

Value investors tend to choose stocks that used to be hot picks, but have recently fallen and can be purchased for less. This can be a good strategy if the company's stock price is down due to temporary problems that can be easily remedied. Once the company turns around, the stock prices should go back up. Investing in this way does require doing some research on companies you're interested in investing in, as well as patience with the market.

Dividend Investing

Dividend investors buy stocks that pay a cash dividend based on the number of shares they own. Dividends are usually paid on a quarterly basis, so in effect, they make money while they hold the stock.

Basically, dividend investors buy stocks as much for the income as they do for capital appreciation (which is what it's called when you sell a stock at a higher price than you paid for it). Dividend investors look for financially solid companies that are likely to continue paying their dividends.

Creating a Stock Trading Plan

Once you've decided what type of investor you are, you need to create a trading plan - and stick to it! When you have a stock trading plan, you stand a much better chance of making money. Don't panic - your plan doesn't have to be complex and complicated. It only needs to have clearly defined goals, but more importantly, it needs to actually be written down.

There are several factors you'll need to consider, but basically you'll want to decide how much money to invest, what stocks to buy, when to buy, the time frame you'll want to hold the stocks and at what point you want to trade the stocks.

Once you have a workable plan in place, it's a good idea to do mock trades for a period of time, whether it be a day or a month. Doing mock trades will help you determine whether your stock trading plan is a strong one, or whether adjustments need to be made in order to reach your goals.

Don't go into the stock market blind. Before you pick any stock, make sure you know what kind of investing you want to do, and then create a plan and stick to it.