Investing In The Stock Market

On this site, I often write about the virtues of investing in the market with index funds.  This is a good strategy, and is what I practice myself.  However, there is also something to be said for the purchase of individual stocks.  When we think of the world’s greatest investors, we are thinking of those who have made wise decisions in purchasing individual stocks.  Warren Buffet immediately comes to mind, as do a slew of others.

Of course, the real challenge when it comes to purchasing stocks is determining the best stocks to buy.   As you might imagine, I don’t have any simple answers for you here.  At best, I can give you some general strategies that work for a lot of people, and you can do your own research and see what works best for you.  I make no claims as to the general effectiveness of these methods, so use at your own risk.  With out of the way, here are some popular stock selection strategies.

photo credit: quinn.anya

Value Investing

Value investing could well be called the “school of Warren Buffet,” though it was actually originally outlined by Buffet’s mentor, Benjamin Graham.  In his book, Security Analysis, Graham lays out the classic rules of stock picking based on value.  In this school of thought, investors are trying to beat the market by selecting stocks that are undervalued at their current market price.  This is determined by a careful analysis of the company’s balance sheet, with estimates made of the future earning potential.  If the company’s future earnings potential is more than the stock price would indicate, the stock is considered a good value.  A simpler form of this approach is to buy stocks with a low price to earnings ratio (P/E ratio).

Growth Investing

In this school of investing, the best stocks are those that have the best growth potential.  Stocks are picked on companies that appear to be ready to grow greatly in the future, as determined by the investors research.  These types of stocks will rarely pay out dividends, as they are investing every cent back into growing the company as fast as possible.  Many investors do well with this investing style.

Penny Stock Investing

This is not a strategy pursued by most real financial professionals, but is quite popular with many individual investors.  According to this school, penny stocks are the best to buy since they incur great percentage changes when compared to normal stocks.  When a $75 stock moves up by $.50, that’s a small change.  When a $2 stock moves up by the same amount, that is a much bigger gain.  However, stocks can move down as well, and predicting the direction of penny stocks isn’t as easy as some gurus would make it sound.  Still, people do make money investing with this style.

This is just a basic overview of how many people determine the best stocks to purchase.  There is no one right answer, so be sure to keep learning everything you can.  After all, your hard earned cash shouldn’t be put just anywhere.  Form a solid investment plan, stick with it, and reap the results.