Be Wary of Stock Advice
When it comes to stock advice, everyone seems to have some ideas to share with you. Stock market advice is found in the newspaper, in magazines, on television, and all over the Internet. The direction of the stock market and the best stocks to buy or sell is often a popular topic around the office and at cocktail parties.
With all of this information freely available to the would-be stock investor, it is important to learn to sort through the noise and be wary of the source when considering the use of this information for your stock buy or sell decisions. More than anything, it is important to rely on what you know to be the facts and to use your own sense of judgment.
The Dangers of Stock Advice
Well-meaning friends and family members might approach you with a stock tip they have heard. If you believe the person to be knowledgeable and credible, you might take the time to conduct your own research regarding the real opportunity those stocks present. The worst sources for stock advice, though, come from email spam and chat room content. These are two of the vehicles that are often used in “pump and dump” schemes. Under these scams, a small group of investors may have taken ownership of a stock that is basically worthless, but they seek to drive up the price through artificial demand they create through massive email campaigns and talking up the stock in forums and chat rooms. When they get people buying, they then dump their shares for a profit, sending the stock price into a plummet.
Conduct Your Own Stock Research
Thoroughly researching a company enables you to understand the product or service the company offers. You should be sure to gain familiarity with the marketplace, the management team and the company fundamentals. In conducting your fundamentals research, you might even run calculations based on growth projections to arrive at a proper or “intrinsic” value of the stock. As you engage in this level of research, you might be surprised to learn how many solid companies with bright futures are trading well below their intrinsic value, offering you a “margin of safety”.
Focus on Companies and Industries You Know
The companies that provide you with the goods and services that satisfy your everyday needs are often publicly-traded, offering you a small piece of ownership. If you believe in the brand, chances are others do, as well. This level of first-hand experience with a company combined with your more qualitative analysis around company fundamentals can help support your investment decision.
Know the Risks of Stock Investing
The major risk of stock investing is that the stock you invest in will fall out of favor with the market, sending the stock price into a decline. Worse yet, the company could fail. While the work you do in the research phase should limit your risk in this regard, it is important to account for this as you determine how much you will invest in the stock.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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