Saturday, August 14, 2010

What triggers you to buy a stock?

Is it a hot tip, strong growth in revenue and earnings, an analyst's recommendation or some bullish news pertaining to potential mergers and acquisitions? For most people, a hot tip is probably the answer. Do you know why is it called a hot tip? Occasionally, a hot tip enables you to make some quick money. But most often it lands you in some hot soup. The tip is hot because it can burn your fingers. So, what should you do when you hear a hot tip? For me, it means a quick look at the chart, and then to do a due diligence on the company. This means looking at the fundamentals of the company. If the chart is in accord with the fundamentals, I will buy. If not, I will avoid.

What, if the chart is bullish, but the stock is not solid? In that case I may put in a small bet with a cut-loss in place. This is to ensure that I can quit with a small loss when the trend goes against me. How about, when the chart is flat, but the stock is undervalued? In this case, I will keep an eye on the stock, wait until the chart shows a buy signal and then buy. Does this make sense to you?

Different people buy equities for different reasons. For some it is for capital gains while for others it is more for the dividends. One reason that applies to all is that the shares are bought for sale later, hopefully, for a profit. Thus when you buy a share, it behooves you to ask yourself whether you can make profit buying the shares. If you answer is: Sure. Well and good. But if your answer is: Maybe. Then you should bet only what you can comfortably lose.

Opportunities neglected seldom return. An excellent opportunity is difficult to come by. When you happen to meet one, make the best use of it; put in a sizable bet. This is what wisdom is all about.

What is a sizable bet? This is subjective. To some 500,000 is a small bet, while to others 50,000 is too much. You should know your own.