The Handy Investing Answer Book. Paul A Tucci

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      Many experts believe you need to make certain decisions before you begin to invest in a particular stock. Some of these decisions may include: the point or price at which you will buy and sell the equity, how long you plan to hold the equity, and at what price increase or decrease you are willing to sell the equity.

      How do I begin to select individual stocks?

      Many experts agree there is no perfect method for individual stock selection; the choice of what procedure to follow depends upon each individual investor. Most experts agree that at the very beginning of developing your stock portfolio, you should engage in intensive research. In the research phase, you may identify themes, markets, segments, industries, or brands on which to focus. This may be followed by an analysis of such fundamental variables as the potential target’s size, debt load, P/E ratio, competitive threats, and earnings potential. Some experts will even test to see how the stock price moves upon the release of news, or how the stock price reacts to certain events that may occur during the course of a year or other historical period. Other investors who seek growth in a stock’s price from the date of purchase may look at the company’s asset value to see if there is hidden value the market seems to have missed. Many experts assert the importance of knowing at what price to acquire a stock, since if you acquire the equity at a relatively high price, it may take a much longer time to realize your goal for the expected rate of return on the investment.

What are some other considerations when I try to identify individual equity target companies?

      There are many different considerations when investors try to distinguish winning stocks from potential problem stocks. Some experts who seek undervalued companies understand that the value of a company may be quite different in the future than it is today. A company may have a short-term management problem that may be solved next month. Meanwhile, the broad investor market may have already abandoned the company, thereby depressing its price. Value investors look very specifically at companies that appear undervalued to try to see if they have the ability to correct themselves over time. Other experts look closely at companies’ and their competitors’ debt to measure the strength of the target company’s financial position. A company that is ready and able to clear away debt may be viewed more favorably than a company that cannot seem to get out of debt. Debt can depress a company’s earnings, and can also cause a company eventually to fold and declare bankruptcy.

      Why do some people prefer to buy individual stocks, instead of purchasing an index fund or a mutual fund?

      There are several reasons why some individual investors prefer to choose and invest in individual stocks, rather than invest their money into index funds or mutual funds. Some experts believe that when you buy an index or mutual fund, you may get many lower-performing stocks along with many top-performing stocks. Even if the top performers do very well, their performance is pulled down by the poorer-performing stocks. Although diversifying one’s portfolio may be a great strategy over the long term, some individual investors believe in specializing in a sector, as they can become more familiar with and learn the dynamics of the sector, and earn a profit. The investor who researches and acquires individual stocks also has a strong interest in the stock market, and is willing to spend the time to do so. Individual investors who cannot be bothered with spending the time to identify, analyze, and invest in individual stocks would probably be better served by buying index or mutual funds. Other experts assert that some individual investors perceive an investment in an index or mutual fund is in some way “safer” than owning a portfolio of individual stocks. If you own an index fund, and the underlying index or market falls—no matter how diversified the index may be—the value of the portfolio will decline, in the same way it would if there were a broad decline in some of your individual stocks. Many experts believe that simply owning an index or mutual fund is no guarantee against losses.

      Some people might want to invest in companies that they consider to be socially or environmentally responsible, 72 such as a clean energy business.

      How do I buy individual stocks?

      You can buy individual stocks through a stockbroker, a stock brokerage firm, certain banks that offer stock investments, online brokerage firms, and directly from some companies that offer stocks directly to consumers.

      What are some general factors that might be interesting to use while I evaluate a stock?

      Some general factors might be interesting to use while you evaluate a stock, including: whether it is a company you know and understand; is in an industry that you understand; has a stable management team; is diverse geographically (not concentrated in any region or country); and is a great place to work.

      What are some macroeconomic factors that might influence the growth of a stock’s price?

      Many macroeconomic factors might influence the growth of a stock’s price. Economic trends that might affect a stock’s price help place the stock in the context of aspects of the economy that may suppress or grow the company’s earnings. The company could be dependent on oil prices, employment rates, currency values, prices of commodities, etc.

      What types of financial signs should I investigate?

      Investors need to look for various financial signs that signify a buying opportunity. Many experts believe that investors should 1) find companies with strong quarterly earnings growth over a long time period; 2) consider the size of the company’s debt load (especially relative to other competitors); 3) consider the diversity or concentration of the company’s income streams; 4) consider the company ’s annual sales growth over time; 5) identify the company’s ability to make great products year-in and year-out; 6) determine the company’s ability to control expenses; and 7) determine whether the company uses capital wisely. You may also want to investigate if the company spends money appropriately on other cash-intensive items, such as people, equipment, marketing, research and development, etc.

       How important are market forces on the long-term growth of a stock’s price?

      Many market forces work in tandem to influence the perception of a particular stock to investors. It is important to focus on the size of the market potential for the target company’s products, threats to the company’s products or profits, and whether the market in which the company is competing is in a state of growth or decline.

      What about the analysis of the stock itself?

      It is good to see if the company’s stock price is outperforming its peers, whether the price of the stock is too high or too low, and the reasons why. You may also want to know if any single individual or entity owns a large percentage of the stock, which could influence its price. It is also good to know if the company regularly pays a dividend to its shareholders.

      What is “preferred stock”?

      Preferred stock is stock or equities issued by a company that combines some qualities of common stock with some qualities of a bond. When you own preferred stock in a company, it is considered preferred because under normal circumstances, the shareholder is paid a dividend on the shares before all other classes of stock issued by the company. In the event of the company’s bankruptcy or liquidation, preferred shareholders receive their share of assets before common stockholders (but behind bondholders). The terms of the preferred shares in which you may invest are found in the prospectus of the investment offering, and in the company’s articles of association. Preferred stock is also rated by many ratings agencies (e.g., Moody’s). Preferred stock may be either cumulative (the company must pay a stated dividend in arrears, if it misses that payment) or non-cumulative (the company does not have to pay a missed stated dividend payment in arrears). Each class of preferred stock in a company confers upon the owner certain rights, as each class or issuance of preferred stock may have different terms. Convertible preferred stock allows you to convert the preferred stock to shares of common stock. Investors in preferred stock generally do not experience the great variations in price that common stockholders experience, so long as the company is paying its stated dividends to the preferred shareholders regularly.

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