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How to Invest in Stocks

Investing in stocks is a way to create wealth in the long term. However, a lot of people who invested in stocks lost money in the past decade. Some of the reasons are speculating, lack of knowledge, listen to their friends’ hot tips. As a result, they often choose the wrong stock, entry or exit at the wrong time and end up losing money in the stock market. Before you invest money in stocks, you must learn how to invest.

How to Invest in Stocks

Investing in the long term means you are betting on a company that will do well in the future and therefore their stock price will rise in value. How to determine whether or not a company is doing well? You will have to start by studying the fundamental of the company. You want to learn their competitors, company management, their products and their financial statements like income statement and balance sheet. This might sound a lot, but it really doesn’t require a accounting degree to accomplish this. If you are not familiar with financial statements, I would recommend you read Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports.

How to Invest in Stocks

Fundamental Analysis is basically what you need to learn to invest in stocks. Fundamental Analysis is a way for investors to use financial data and evaluate a company to see whether or not a company is worth investing. Warren Buffett, the world’s greatest investor and the second richest person on earth uses fundamental analysis to invest successfully. There are dozens of books available that teaches you how to apply fundamental analysis to investing, I recommend you start with How to Make Money in Stocks: A Winning System in Good Times and Bad, Fourth Edition. This book is written by William J. O’Neil, who founded the business newspaper Investor’s Business Daily. The book teaches you how to use the CAN SLIM method to invest in stocks and this exactly what I use to buy stocks.

Growth Stocks

C - Current quarterly earnings per share has increased at least 18-20% from the same quarters’ earnings reported in the prior year.

A - Annual earnings increases a nice percentage over the last five years.

N - Buy companies with new products, management, and other new events. Preferably, the company’s stock is making new highs. Forget about cheap stock, they are cheap for a reason.

S - Small supply and large demand drives the stock prices up. 95% of the companies having huge gains in had fewer than 25 million shares outstanding. Look for companies acquiring their own stock, that is a sign that a company is doing well.

L - Always choose industry leaders over laggard stocks within the same industry. Industry leaders usually do better than other companies in the long run.

I - Buy stocks with a least few institutions sponsors with recent above average performance. Be cautious of stocks that are over owned by institutions.

M - The general market. Learn how to determine market direction by studying the market averages daily.

The CAN SLIM is an approach to buy growth stocks. There is another approach of stock investing called value investing.

Value Investing

Value Investing is a way for investors to search for companies’ share price that trade less than their intrinsic values. Value investors look for stocks of companies that they believe the market has undervalued. They believe those stock will eventually rise in value once the market catch up. Value investing is the approach that Warren Buffett uses. The best book on value investing is The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition).

If you want to learn more about how to invest in stocks, check out these fundamental analysis books.

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