Becoming Better Investor
Before making a decision to become a better investor, an individual must first ascertain the difference between trading the stock market and investing in the stock market. The difference is more than simply semantics, with a serious gulf demarking the philosophy of trading and the philosophy of investing.
A person who fancies themselves as a stock market trader ascribes to a buy-and-sell philosophy, one which mandates the repeated purchase and sale of an entity in order to derive the most profit. The notion of trading requires an individual to buy at a prescribed price, and then sell soon afterwards to skim some profits off the top. This is the basic idea behind day trading, although that particular sect of trader makes up a small percentage of the market.
A person who sees themselves as a stock market investor adheres to the traditional buy-and-hold philosophy. This approach admonishes them to purchase stock in a company that may be undervalued and hold it for a long period of time, at which point the stock will be worth more money. The buy-and-hold approach is the tact taken by better investors over the years, largely because of the lack of access average citizens had to the stock market and because of the cost associated with investing.
Here are five steps that may help you become a better investor:
- Look for companies that have lost value during the recent economic downturn. Many of them are available at depressed prices and can be purchased as a bargain. Most of these blue chip companies will emerge from the recessionary period as a leaner, stronger company. These stocks can be a smart purchase for a better investor who is willing to hold them.
- Look for a stock's average daily volume for an indication as to its liquidity. Remember, you'll eventually be a seller for every stock you purchase, so buy a stock with enough volume in order to be a safer, better investor when the markets take a tumble. A guideline to consider: Any stock priced at more than $5 a share should have volume of at least 500,000 shares each trading day.
- Compare the 52-week high and the 52-week low price to see where the stock is now compared to a year ago. The broader the trading range, the more likely the stock will experience large price moves in the future. Stocks trading near their high or low prices may also be closing in on support or resistance levels that can have an impact on their profitability.
- Examine the stock's market capitalization. Beware of trading micro cap stocks, which have a market cap of $150 million or less, since they receive very little scrutiny by analysts and provide the least amount of information. Be a better investor by becoming a smarter investor.
- Look at the price-to-earnings ratio and compare it to others within the same sector. This is a good way to see if the stock is overpriced. A lower PE number is preferable and can be used as tie-breaking criteria when deciding between two stocks.
By factoring these steps into your decision, you can become a better investor. Making a more-informed selection in the market should ultimately produce more profits, which is what the stock market is all about.
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