So Many Shoes, So Little Money – Blog

Picking Stocks

September 6th, 2009

Why invest in stocks and not just bonds? Stocks allow you to invest in companies that can create a lot of value more quickly than bonds. If you pick the right stock, you can make a heck of a lot of money. Of course, if you pick the wrong stock, you can lose a heck of a lot of money. That’s why it’s never a good idea to put all your money into one company.

Now that you know the difference between debt (bonds) and equity (stocks), how do you choose a stock to buy? Where do you begin? One begins by starting to pay attention to the stock market. As you have seen, the stock market is just like any other market, except that stocks are bought and sold as opposed to something else. How do you pay attention?  And what will the market teach you if you do? What does “pay attention” even mean? The stock market reacts to the world at large and the daily news. The market rises and falls (increases and decreases) depending on lots of different things including how the economy is going, whether people are optimistic or pessimistic about the direction of the world, whether wars are being fought, how much the United States pays for oil and even how much people are shopping.

You can start to watch what happens to stocks in general by looking up the Dow Jones Industrial Average. The Dow Jones Industrial Average tracks the stocks of 30 different companies every day. When you hear people discuss the stock market on television, the radio or on the Internet, they typically say things like “The market dropped 100 points today”. Or, “The market rose 30 points today”. When the term “the market” is used, typically they are referring to the Dow Jones Industrial Average. The performance of the thirty stocks the Dow Jones tracks (how well or poorly they are doing) is considered a bellwether of how the financial markets are doing as a whole.

How do you find out what the Dow Jones Industrial Average is doing? Just like a bond, you can look it up in the newspaper or on the Internet. In fact, you can start to follow the stock market in general and the stocks of individual companies in particular by utilizing the finance section of your home page. For example, if you use Yahoo or Google as your home page, you can add content that shows you information on the stock market. You can even add individual stocks to track and follow. How?  Every stock has a trading or ticker symbol, a three or four letter call sign that it is known by on the stock market. The Dow Jones Industrial Average symbol is DJI. You can find stock symbols by Googling “what is the stock symbol for [fill in the name of the company]”. For example, to find the stock symbol for Saks, you would Google “What is the stock symbol for Saks?” The answer: SKS.

As you start to pay attention to the market in general, you should begin to focus on a few companies you know a lot about. For example, if you love your iPhone, start to watch Apple’s stock (symbol: AAPL). If you wouldn’t head to the gym in anything but your Nike’s, start to look at Nike’s stock (symbol: NKE). If you love shopping at the Gap, look at Gap’s stock (symbol: GPS). What are you watching for?  Here are a few things: How does the stock price change in relation to the news about the company? How does the stock’s price change in relation to any announcements the company makes?  How does the stock’s price change in relation to general news about the economy? For example, some stocks are more susceptible to the world around them than others. For example, when the economy is down, people tend to shop less and for less expensive items. Neiman Marcus and Saks do worse in this type of environment than Target or the Gap.

So you don’t fall off your heels, know that despite all of the risks, as a group, stocks have the highest long-term returns of any investment type. Even though stock markets go up and down and, at times, have even crashed, so far, the market has always rebounded and gone on to new heights. If you look at the all your investment choices, on average, stocks have outperformed bonds in a total return (after inflation). A little height can go a long way!

Filed under: Investing

Tags: stock