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As an investor, you have a few options on how you choose the growth stock to invest into. You could go with your gut, a particular favorite of those who have deep pockets and like taking risks. You could go with the information that other investors and forecasters are providing you, after all, they should know what they are talking about. Alternatively, you could do your own homework to be sure that you fully understand what you are putting your money into and what it is likely to bring to you in the long term. This last method may take you a bit more time, but it also makes you an informed investor. And, being informed can lead to further stock returns. The value of growth stocks is one of the many things every investor should know how to determine.
Stock prices will move up or down based on the company’s earnings as well as the forecast for that company which is based on other facts. Stock prices and knowing where they are heading is the one key tools you must have if you want to make money. Growth stock picks should be made based on the company’s earnings as well as their ability either to keep this level or to increase it. What key information do you need to know?
Companies release their earnings quarterly, which generally happens in January, April, July and October. These reports give you an inside view into the company’s movements and allow you to see what is likely to happen during the months ahead. Statistics you need to take into consideration include the company’s earnings per share as well as the net income reports.
One important figure you need to keep in mind is what the earnings per share equal. As a mathematical formula, the earnings per share are equal to the Net income minus the dividends on preferred stock divided by the average outstanding shares. Another formula you should know is the P/E Ratio (Price to Earnings Ratio). This is equal to the current growth stock price over the annual earnings per share. Yet another formula to use to help you calculate the forecasted earnings of a company is the Forward Price to Earnings Ratio or F P/E ratio. This is the current stock price divided by the forecasted annual earnings per share. That will give you an overall growth stock analysis of your stock pick.
Once you know these details, you can clearly see where stock prices are moving and where your potential profit lies. Do not do all the work yourself, if you do not want to, but have a good idea where the numbers you see are coming from.
Because it is sometimes hard for investors to become experts on various businesses—for example, what are the best steel, automobile, or telephone companies—investors often depend on professionals who are trained to investigate companies and recommend companies that are likely to succeed.
Since it takes work to make excellent growth stock pick of the companies that have the best chance to do well in the future, many investors choose to invest in mutual funds.
What is a mutual fund?
A mutual fund is a pool of money run by a professional or group of professionals called the “investment adviser.” In a managed mutual fund, after investigating the prospects of many companies, the fund’s investment adviser will perform an investment analysis and pick the stocks or bonds of companies and put them into a fund. Investors can buy shares of the fund, and their shares rise or fall in value as the values of the stocks and bonds in the fund rise and fall.
Investors may typically pay a fee when they buy or sell their shares in the fund, and those fees in part pay the salaries and expenses of the professionals who manage the fund.
Even small fees can and do add up and eat into a significant chunk of the returns a mutual fund is likely to produce, so you need to look carefully at how much a fund costs and think about how much it will cost you over the amount of time you plan to own its shares. If two funds are similar in every way except that one charges a higher fee than the other, you’ll make more money by choosing the fund with the lower annual costs.
Mutual Funds Without Active Management
One way that investors can obtain for themselves nearly the full returns of the stock market is to invest in an “index fund.” This is a mutual fund that does not attempt to pick and choose stocks of individual companies based upon the research of the mutual fund managers or to try to time the market’s movements. An index fund seeks to equal the returns of a major stock index, such as the Standard & Poor 500, the Wilshire 5000, or the Russell 3000. Through computer programmed buying and selling, an index fund tracks the holdings of a chosen index, and so shows the same returns as an index minus, of course, the annual fees involved in running the fund. The fees for index mutual funds generally are much lower than the fees for managed mutual funds.
Historical data shows that index funds have, primarily because of their lower fees, enjoyed higher returns than the average managed mutual fund. But, like any investment, index funds involve risk.
Watch “Turnover” to Avoid Paying Excess Taxes
To maximize your mutual fund returns, or any investment returns, know the effect that taxes can have on what actually ends up in your pocket. Mutual funds that trade quickly in and out of stocks will have what is known as “high turnover.” While selling a stock that has moved up in price does lock in a profit for the fund, this is a profit for which taxes have to be paid. Turnover in a fund creates taxable capital gains, which are paid by the mutual fund shareholders.
The SEC requires all mutual funds to show both their before- and after-tax returns. The differences between what a fund is reportedly earning, and what a fund is earning after taxes are paid on the dividends and capital gains, can be quite striking. If you plan to hold mutual funds in a taxable account, be sure to check out these historical returns in the mutual fund prospectus to see what kind of taxes you might be likely to incur.
Many companies offer investors the opportunity to buy either stocks or bonds. The following example shows you how stocks and bonds differ.
Let’s say you believe that a company that makes automobiles may be a good investment. Everyone you know is buying one of its cars, and your friends report that the company’s cars rarely break down and run well for years. You either have an investment professional investigate the company and read as much as possible about it, or you do it yourself.
After your research, you’re convinced it’s a solid company that will sell many more cars in the years ahead. The automobile company offers both stocks and bonds. With the bonds, the company agrees to pay you back your initial investment in ten years, plus pay you interest twice a year at the rate of 8% a year.
If you buy the stock, you take on the risk of potentially losing a portion or all of your initial investment if the company does poorly or the stock market drops in value. But you also may see the stock increase in value beyond what you could earn from the bonds. If you buy the stock, you become an “owner” of the company.
You wrestle with the decision. If you buy the bonds, you will get your money back plus the 8% interest a year. And you think the company will be able to honor its promise to you on the bonds because it has been in business for many years and doesn’t look like it could go bankrupt. The company has a long history of making cars and you know that its stock has gone up in price by an average of 9% a year, plus it has typically paid stockholders a dividend of 3% from its profits each year.
You take your time and make a careful decision. Only time will tell if you made the right stock analysis or bond choice. You’ll keep a close eye on the company and keep the stock as long as the company keeps selling a quality car that consumers want to drive, and it can make an acceptable profit from its sales.
When you make an investment, you are giving your money to a company or an enterprise, hoping that it will be successful and pay you back with even more money.
Some investments make money, and some don’t. You can potentially make money in an investment if:
The company performs better than its competitors.
Other investors recognize it’s a good company, so that when it comes time to sell your investment, others want to buy it.
The company makes profits, meaning they make enough money to pay you interest for your bond, or maybe dividends on your growth stock picks.
You can lose money if:
The company’s competitors are better than it is.
Consumers don’t want to buy the company’s products or services.
The company’s officers fail at managing the business well, they spend too much money, and their expenses are larger than their profits.
Other investors that you would need to sell to think the company’s stock is too expensive given its performance and future outlook.
The people running the company are dishonest. They use your money to buy homes, clothes, and vacations, instead of using your money on the business.
They lie about any aspect of the business: claim past or future profits that do not exist, claim it has contracts to sell its products when it doesn’t, or make up fake numbers on their finances to dupe investors.
The brokers who sell the company’s stock manipulate the price so that it doesn’t reflect the true value of the company. After they pump up the price, these brokers dump the penny stock, the price falls, and investors lose their money.
For whatever reason, you have to sell your investment when the market is down.
We will discuss some kinds of investments you may consider making! Stay Tune.
Whenever you want to buy a stock, trade it or invest in it, you always want to get a stock pick that performs well. You want a high-flyer, a sky-shooter. Right?
Well, most of the traders out there try to find the “best” stocks and after having found them they want to know the “best” entry point. This entry point is another issue traders are most interested in.
The secret is: You don’t need any of these. You don’t need to search for the best stock, because you don’t know in advance which stock will perform best, you can only guess based on certain criteria you have chosen for yourself.
Finding excellent entry points is something professional traders are least worried about. Some even say that you can choose an entry system based on chance. They know that for succeeding in stock trading other matters are much more important.
These are:
- You: why do you want to trade?
- Enter: What is your entering signal and what is your concept?
- Protection: When shall you close your trade with a loss?
- Exit: When do you have to exit your trade?
- Position Size: How much of your capital should you invest?
The last point “Position Sizing” is the most important factor for success and it’s the part of the system few people pay attention to.
But first let’s just try to explain why the “You” is very important.
1. The “You” part of the system
Now, don’t think that you can just skip this section. I told you that this is a part crucial for your success. You must know yourself before you should begin to trade any market.
What should you know about yourself? You must find clear answers to the following questions:
1. Why do you want to trade or invest?
The answer should not just be “to earn money”. It must be a little bit more precise. You have to know if you need this extra earned money for survival or if you just want additional money. If the first is the case then you should know that the capital you have must be protected by all means.
2. How much money do you need per year?
If you need $30,000 per year and have $30,000 to invest, then you must make 100% every year to just fulfil your needs. 100% per year is, of course, astronomical. Additionally, this would not give you the chance to increase your initial capital.
3. What are your strengths and weaknesses?
Are you disciplined enough to follow a set trading system (which you will learn in the later chapters) even if it sometimes doesn’t show the results you want? Can you stick to your system without letting yourself get influenced by others or the media? How do you cope with consecutive losses?
4. How much are you expecting to profit annually on a percentage basis?
Do you want to earn 20%, 50% or even 100% per year and….
5. How much risk would you think is bearable to get these profits?
It’s quite clear that you cannot expect to win 100% with only accepting a 20% loss probability. A good trading system can show a 200% return with a loss probability of 50%. But how would you feel if you lost 50% of all your money? Could you endure this easily? Note that you would have to make 100% in order to even up after having lost 50% !
6. How much time can you spend for your trading?
This would deal with the matter of having the possibility to trade (much time) or to invest (less time).
7. What is the highest daily price fluctuation you can stand?
If daily price movements of 10% to the up or down or even higher are too nerve-wracking then you should stay away from small capitalization (cap) stocks and concentrate on mid and big caps (like Microsoft or IBM).
Take your time in answering these questions, don’t just reply to them in your mind, write the answers down. If you don’t want to do it now, its ok, but then you shouldn’t begin to enter any stock market, because knowing yourself is the foundation for your trading system.
Some traders even say that this is half of your trading system, so take it very seriously.
Mutual Funds. One way to invest internationally is through mutual funds. There are different kinds of funds that invest in foreign stocks.
Global funds invest primarily in foreign companies, but may also invest in U.S. companies.
International funds generally limit their investments to companies outside the United States.
Regional or country funds invest principally in companies located in a particular geographical region (such as Europe or Latin America) or in a single country. Some funds invest only in emerging markets, while others concentrate on more developed markets.
International index funds try to track the results of a particular foreign market index. Index funds differ from actively managed funds, whose managers pick stocks based on research about the companies.
International investing through mutual funds can reduce some of the risks mentioned earlier. Mutual funds provide more diversification than most investors could achieve on their own. The fund manager also should be familiar with international investing and have the resources to research foreign companies. The fund will handle currency conversions and pay any foreign taxes, and is likely to understand the different operations of foreign stock market.
Like other international investments, mutual funds that invest internationally probably will have higher costs than funds that invest only in U.S. growth stocks. Also, you should learn as much as you can about a company before you invest. Try to learn about the political, economic, and social conditions in the company’s home country, so you will understand better the factors that affect the company’s financial results and stock price. If you invest internationally through mutual funds, make sure you know the countries where the fund invests and understand the kinds of investments it makes.
You probably heard a lot about different trading and investing concepts. The two main groups can be separated into fundamental and technical analysis. Which of the two is better? Good question. It is a fact that the advocates of the respective groups claim that theirs is working better. And it is also a fact that they cannot help you and you don’t need their opinion.
You must decide on your own which of the two is more convincing to you. But that doesn’t mean that you cannot combine them. A lot of investors and traders do this. Generally, fundamental growth stock analysis which only is about key ratios and figures of the company (e.g. Price-Earnings-Ratios [PE or PEG]), is used for long term investing, whereas technical analysis is the main tool for traders.
You only have to stick to your selected principles. If you don’t do that you will lose. You must show iron clad discipline and follow your system even if it doesn’t show positive results immediately. That is by the way another reason why traders fail. They change their system too often; because they are lacking self-confidence. And this latter point is destructive in all fields of life.
Now, after your system is clearly chosen, you have to decide when you want to enter a certain growth stock that you have found to be worth investing.
The problem is that there are too many entering criteria and you can again ask which of them is best. You should ask which of them is best for YOU. That is the point. Or can you tell me which car is the best in the world? This also differs from person to person.
Therefore, I will present you some of them and you will decide which is most suitable to your concept.
- Breakout from a channel
There are a lot of channels to be taken into consideration. If you take the 50-day channel then you should enter a stock or a market when the stock hits a new high in the last 50 days (and you go short if the market hits a new 50-day-low). Don’t take a too low channel as a breakout signal. Tests have shown that something between 40 and 100 seems to bring better results than other channels.
Before applying this rule try to find a growth stock where a trend has already grown. Moreover, a volume breakout accompanied by a channel breakout amplifies the reliability of this entry signal.
2. Entry based on the chart pattern
Some traders do only determine an entry by merely having a glance at the chart of a stock. And some of them say that you shouldn’t look at it too long as the longer you look at it the more positive you are about the chart although the chart doesn’t show a clear trend.
To convey this rule efficiently you should be in the position to see patterns fast. The highly successful trader Ed Seykota for example takes a chart of a stock, hangs it up on the wall and goes to the other end of the room. He watches the chart from that position and if he still can see the trend clearly he acts upon it. He generally takes long term charts. But what is long term?
You can take 6-months- or 1-year-charts and decide according to this easy-to-use entry rule, which however is not as simple to convey.
3. Entry based on moving average lines
This rule is very easy to understand and to use. You buy if the shorter term moving average crosses the farer term average from down to the up. If the shorter one remains above the farer one you still hold the stock. Which moving averages should you take? Well, admittedly different combinations are recommended.
But you can for example take the 5-day and the 20-day moving averages. If the 5-day average crosses the 20-day from down to the up you buy.
The problem in using this method as an entry signal is that it only gives good results when the stock or the market is in a clear upward or downward trend.
This drawback was solved by R.C. Allen who uses a different, enhanced approach. He takes 3 moving averages, namely the 4-, 9- and 18-day moving averages.
Only if both of the shorter term averages, the 4- and the 9-day, cross the 18-day average from down to up, you get a buy signal. After that, when the 4-day average crosses the 9-day again you have to exit.
If both of them are on different sides of the 18-day average, you do nothing.
I only have presented 4 different approaches to define an entry signal. However, there are lots more of them. I have for example excluded using chart patterns or candlestick patterns as entry signals, which is not because they are not working well. But they are much more complex and not always better than just randomly entering a market.
Nevertheless, you should also know how they work in order to decide for yourself if they suit you.
The next part will be about protection. You will learn when to exit if the stock doesn’t move in your favor.
Although you take risks when you invest in any domestic growth stock, international investing has some special risks:
Changes in currency exchange rates. When the exchange rate between the foreign currency of an international investment and the U.S. dollar changes, it can increase or reduce your investment return. How does this work? Foreign companies trade and pay dividends in the currency of their local market. When you receive dividends or sell your international investment, you will need to convert the cash you receive into U.S. dollars. During a period when the foreign currency is strong compared to the U.S. dollar, this strength increases your investment return because your foreign earnings translate into more dollars. If the foreign currency weakens compared to the U.S. dollar, this weakness reduces your investment return because your earnings translate into fewer dollars. In addition to exchange rates, you should be aware that some countries may impose foreign currency controls that restrict or delay you from moving currency out of a country.
Dramatic changes in market value. Foreign stock markets, like all stock markets, can experience dramatic changes in market value. One way to reduce the impact of these price changes is to invest for the long term and try to ride out sharp upswings and downturns in the market. Individual investors frequently lose money when they try to “time” the stock market in the United States and are even less likely to succeed in a foreign market. When you “time” the market you have to make two astute decisions — deciding when to get out before prices fall and when to get back in before prices rise again.
Political, and economic events. It is difficult for investors to understand all the political, economic, and social factors that influence foreign markets. These factors provide diversification, but they also contribute to the risk of international investing.
Lack of liquidity. Foreign stock markets may have lower trading volumes and fewer listed companies. They may only be open a few hours a day. Some countries restrict the amount or type of stocks that foreign investors may purchase. You may have to pay premium prices to buy a foreign security and have difficulty finding a buyer when you want to sell.
Less information. Many foreign companies do not provide investors with the same type of information as U.S. public companies. It may be difficult to locate up-to-date information, and the information the company publishes my not be in English.
Reliance on foreign legal remedies. If you have a problem with your investment, you may not be able to sue the company in the United States. Even if you sue successfully in a U.S. court, you may not be able to collect on a U.S. judgment against a foreign company. You may have to rely on whatever legal remedies are available in the company’s home country.
Different market operations. Foreign stock markets often operate differently from the major U.S. trading markets. For example, there may be different periods for clearance and settlement of securities transactions. Some foreign markets may not report stock trades as quickly as U.S. markets. Rules providing for the safekeeping of shares held by custodian banks or depositories may not be as well developed in some foreign markets, with the risk that your shares may not be protected if the custodian has credit problems or fails.
