So, if you’re like many American, you may end up buying shares in publicly traded corporations at some time in your life. Buying stocks can be tricky and I’ve made a lot of mistakes. Having learned the hard way, I’ve concluded that a smart buy involves at least two things: due diligence and price considerations.
1) Due Diligence: This is a investing geeks way of saying you need to research your buy before purchasing your shares. For what it worth, my investments have usually turned out better when I did a great deal of research before buying the stock.
For example, when I first heard about Exxon Mobile (XOM) back in 2002. I invested several hours learning about the company, checking their finances and seeing what various investment analysts had to say about them. In contrast, I picked up a few shares of Novastar Financial Corp. (NFI) after having done about 15 minutes of internet searches. Did doing the due diligence matter? Check out the graph to see how my picks have worked out (BIG Hint: NFI is on the verge of becoming
worthless).
The main point here is you need to do a lot of research before you buy stocks. At a bare minimum, pull the company’s quarterly reports from the securities and exchange commission. If you have more time, check out any available conference calls with management and see what rating agencies like MSN finance, Smith Barney, and Standard and Poors have to say. Information from the rating agencies is expensive, but the data is often worth it. If you’re going to invest any serious amount of money, it pays to be sure about your investment.
2) Price: Price is how much you pay for your stock. This matters less than due diligence. This also doesn’t matter if you’re buying a relatively small amount of shares. For example, if you’re purchasing 10 shares of stock at $19.20, and you get a discount at $19.00, that’s a savings of $2.00. But, if you’re buying 1,000 shares, the savings is $200. To try to get a better price, my advice would be to watch the stock for a while and look for a good entry point. That said, you shouldn’t get too hung up on this. So, if you can’t find the perfect price, but you think the stock is reasonably valued, go ahead and buy.
A lot goes into buying stocks. If you’re interested in learning more, I recommend that you check out Charles Carlson’s Eight Steps to Seven Figures. He provides a good sense of what types of stocks to purchase and clearly shows how a long term “buy and hold” strategy can provide you lasting success in the stock market.
Best,
James
