All you want to know but never asked about the stocks and options markets.

lunes, 21 de marzo de 2016

Five Rules for Selecting Stocks

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There is a huge amount of stocks to choose from, so picking the right can be a challenge for most investors. The stocks you choose to some extent depend on your own personal investment strategy, but there are a number of simple rules that apply to almost any market sector or investment approach.

Look for only the Best-in-their-Class stocks

Very few people get rich when investing in stocks with average performance. Look for companies that have a strong market leadership. For many sectors, this means investing in companies with highly recognized and valued brands. Apart from the fact that brands reflect what customers think about a company, they also act as a defense when things go off track from time to time. By investing in companies that have tremendous brands or those whose brands are emerging quickly, you are buying into a company that is generating a wave of momentum.

Choose a business model that you understand

In order to select the winning investments, you must be able to assess how well a company is placed. This is how Warren Buffett built his fortune - choosing companies with excellent fundamentals that he understood. If you do not understand how a business works, how you can predict how it will behave? Also, if you have some knowledge about specific industries, consider focusing on them because your ideas will give you an advantage.

Avoid Investing in companies with too little capital

There are some small-cap companies in which it is worth investing - and they can generate huge profits in exchange for a significant risk. However these should represent a small proportion of your portfolio. For stability and predictable growth, invest in companies with medium and large capitalization, and with a successful track record. This is closely aligned with the best-in-your-class approach - leading brands are rewarded with significant sales, so do not stay with small cap companies for long.

Focus on Dividends

While some large investments do not pay dividends - Google jumps to mind - the fact is that large companies which usually are considered good investment options, pay dividends on a regular basis. A dividend is not only a sign of confidence in their own company earnings prospects and growth, but is also a tangible return on investment. Otherwise, your benefits will only paper gains linked to the rise and fall of stocks - remember what happened to RIM (now BlackBerry).

Pay attention to past performance

While it is true that past performance is no guarantee of future performance, ignore the past results is a serious error. Here's the bottom line - would you rather invest in a company with a track record of creating shareholder value, or in one company that has consistently failed to deliver value? 

This is obviously a rhetorical question - there is only one answer. Do not worry too much if there has been a failure in the last year or so - in fact, this may be a good buying opportunity, provided that the way forward is clear - but make sure the company has a clear and reasonable path at the long term.

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