The Insider Info on Stock Investing
Apr 18th, 2008 by Kaushik Adhikary
There are three basic sources that most individual investors get their investment ideas and decide to buy stocks and these are-
1. They often get their investment idea and recommendation either from a broker, relatives or friends;
2. They may have personal experiences using a company’s products or services or
(3) They may have seen or learnt from the media a company’s financial worth. An investor may end up screening a great stock from one of this source, but there is probably a better chance the stock will be a loser.
Buying stocks based on a hot tip from a friend or family members is usually not a smart move.The sources of information reaching to them may sometimes be questionable or have a hidden agenda.The person recommending stocks usually fails to follow them up and recommend an exit point to sell the scrip.
Its mostly seen that the hotter the tip, the more speculative it is likely to be. You probably are told that these stocks have a good chance of doubling or even tripling in value over a stipulated time frame, whereas there may be a greater probability that could lose a half to a third of your investment. One of the golden rule of investment is if you want to gain bigger returns you have to accept greater risk than the market. There is no free lunch.
Many a times broker are helpful in providing with right information, but they always have a financial interest in giving you advice on specific stocks. After all, they are here to make money from commissions when you purchase one of their recommended stock.
The second most common way people choose stocks is by getting familiarity with the company and its products or services. If you like that company based on quality products and services, you may think that others will do so.The problem with this assumption is that many people come to this conclusion without considering the company’s financial health or competitive aspect.
The products of a company that you think are of great value may be tremendous deal for consumers, but in some cases may not produce much profit to the comapny. Morever, you may assume that particular products could be a big money maker, but in practical it might represent only a small fraction of the company’s revenues. Even good companies with several successful product lines do not necessarily be good stocks. Many a times these companies can have stock valuations that are very expensive compared to what they can realistically expect to earn going forward.
A third main way investors choose their stocks is by the media reporting a hot positive news development for the company.For instance, when a news channel says that a partucular company has a new potential blockbuster product in its arsenal or another company has a new revolutionary tech product, this will definitely attract a lot of investor interest.
The main problem of having with this kind of view is that besides you, many other people will be getting the same information. By the time the information is conveyed to the marketplace, there is a good chance that the stocks may have moved upward already and not allow the investor to get a favorable price.These stocks tend to have most of the good news already reflected in the stock price.The stock market itself is usually very efficient in absorbing breaking news events into the price of a stock.
The main reasons why most people rely on these three strategies for choosing stocks are their traditional habit, laziness, and lack of knowledge or self-confidence to do it in other ways.They have always done it that way, and they do little about to change them.The stock tip you get from your friends or the idea of stock picking based on your own experiences may not help you judge your tolerance level for risk and your time frame.
Even if you think about it in different way and compare a stock with some of its peers and learn as much about the company as you can. In today’s world tools are widely available at little or no cost that make the comparison easy.But its unfortunate that most people do little research about safe investment of their life’s savings.They sometimes wipe out their hard-earned investment following a wrong tip.
