The best stocks to invest in are those that are going to
mature in value. Really that’s an obvious, fundamental and inarguable
statement. There is of course another factor that needs to be taken
into consideration and that’s the potential for income from a stock
holding.
To some investors, especially older persons who’ve retired, the
prospects for income are probably more important than the potential for
capital growth. It may well be that income from shares is a retiree’s
main source of income and, as he or she gets older, any capital
appreciation takes on less significance. There’s a style of phrase
that’s often used about investment propositions - “past performance is
not necessarily a guide to future performance”. Unfortunately, an
investor has little else to help his decision making in this area. If a
company has consistently paid good dividends and there have been no
major changes in either its senior management or external issues to
affect it, then it’s likely that it’ll continue to pay good dividends.
When it comes to looking at stock from an appreciation point of view,
there’s much more to take into account. Investing in the stock market
has been described as “trying to out-anticipate the professional
anticipators”.
The objective is to buy when prices are low and sell when they’re high
but it’s knowing when those peaks and troughs have been reached that’s
the hard part. These days professional portfolio managers use computer
models to work out when the peaks and troughs are going to occur but
they’re far from fool-proof. Some investment companies - banks and
insurance companies - buy and sell automatically.
When a stock loses a predetermined percentage of its price, the
in-house computer will automatically connect to NASDAQ and sell.
Similarly, the program will hold stock values in an index and if a
price reaches that value, again NASDAQ will be contacted automatically
and a purchase made. Sometimes these automated systems can be their own
downfall. It’s a generally accepted belief that the stock market falls
of 1987 and 2002 were exacerbated by automated selling. It all happened
so quickly that, by the time the human managers realised what was going
on, it was too late and the damage had been done.
Which ever is the more important criteria, the independent investor
must be wary. Research and planning are keys to successful stock
trading as they are in any field of human activity. Many people say
that nobody should put money into stocks that they can’t afford to lose
- if only it were that simple. A potential investment then needs to be
researched. The track record of its management should be checked out
and its several most recent reports scrutinized. The CEO’s most recent
utterings need to be investigated and his plans and ambitions taken
into account. The general trends for the economy as a whole need to be
looked into and the trends in the industry or commercial activity the
business is involved in must be examined.
If all then looks in good order, if the trends look to be upward, it’ll
probably be safe to make the investment. Alternatively, don’t do any of
that, consult a rofessional adviser or stick a pin into the Dow Jones
list in the Wall Street Journal.
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