Eight Steps to Building a Solid Stock Portfolio

Easy access to investing information and the availability of online trading has made life much more enjoyable and less costly for do-it-yourself investors. The Internet has brought the "trading" desk to millions of households and it is now possible to buy and sell shares, options, warrants, interest rate securities and managed funds from your own home. All you need is a computer and an internet connection. In addition, you can do your own research on a particular company or fund manager as well as finding out what some stock brokers are recommending to their clients. Much of this information is free or available at a reasonable cost and you can save yourself hundreds, or even thousands of dollars in fees and commissions every year via the internet. Rather than go through a full service stock broker or investment advisor, why not give it a try?

When building your own stock portfolio, here are some pitfalls you need to avoid!

While you can find a plethora of good information on stocks, you can also find very poor information. Each website claims to have the latest hot picks or the "top ten" stock buys and often they contradict each other. Who do you believe and what about the scams? 

You will undoubtedly come across websites and chat rooms that give investment advice or tips about investments, but many of these are not qualified to do so. The information may be wrong or misleading and some websites even repeat incorrect rumors.

There is overwhelming evidence that you will not become rich by listening to the advice of others. As an investor you need raw information, not recommendations. You would not buy a car just by looking at it...nor should you buy a company's stock without doing significant research. There is no point trying to take control of your finances if you are going to rely solely on a "tip" from a newspaper or a broker or an internet chat room. It is true that someone may know more about a particular company or stock than you, but they could easily be wrong - so do your own homework!

You need to be certain that you have sound reasons for investing in a particular company. Does the company have an instantly recognizable name? Do you understand what the company does? Do the products or services of the company stand a good chance of being in high demand in a 10, 20 or 30 year time frame? Does it have a management team that moves with the times and is innovative, yet keeps a firm grip on the company's finances? Most of this information is available in a company's Annual Report, but make sure that you read it with a degree of skepticism...most reports are written to promote the company.

In the Annual Report, the financial statements, the balance sheet, the profit & loss statement and the cash flow statements are very important. They are important because they will help you assess if the company is providing value for your money. You are going to be buying stocks at a certain price and you will want to make sure that you are not paying an excessive amount. The financial numbers give you a snapshot of the financial structure, strength and growth rate of the company. This type of analysis is often called fundamental analysis, and also includes analysis of the economy and industries related to the company.

Keep in-mind that the historical and present prices of a stock hold clues to the future price. In practice, most analysts use fundamental analysis for short and long term buy/sell decisions and use technical analysis to confirm the decision.

Internet websites are a great place to collect information about companies. Naturally, a company owned website will attempt to portray the company in the most sympathetic light. Depending on how serious you want to be about investing, it is advisable to either visit or subscribe to investment research websites. Research websites are valuable tools for any investor and provide company reviews, give general investing information, market updates, stock pickers, stock ratings, watch-lists, portfolio managers, charts, share indexes, newsletters, alerts and model portfolios.

So, how can you structure a stock portfolio to maximize your wealth, ensure your peace of mind, give you total control of your investments, be easy to manage and give satisfaction? Here is a recommended strategy that has worked well for many do-it-yourself investors:

1. Subscribe to a well respected investment research website dedicated to analyzing financial information for investors. They are independent from companies they list, do not receive commissions or brokerage and rely solely on investor subscriptions for income. They have to give their subscribers quality information to maintain subscriber confidence.

2. Look for the model portfolios they have developed and study the methodology they have used to create and maintain each portfolio.

3. Read the research reports supplied for each stock and study the graphs supplied for price movements and trading volumes. Get a good feel for both the long term and the short term trends of the stock.

4. Test each portfolio within a designated test period i.e., one month, one quarter, one year etc. Depending on the website, you can set up each of the model portfolios in a free portfolio manager provided on the website with unlimited stocks. Set a starting date for a test period where you "buy" stocks listed in the model portfolio at the closing price for that day. Make sure you include brokerage as it is part of the cost base for the stock. The website should either maintain up-to-date or 20 minute delayed stock prices, so a running balance can be maintained for the profit/loss for each stock over the designated period.

5. Compare each portfolio's published results with the results that you have achieved in the portfolio manager. They should agree with each other when the same stocks are compared over the same time period. Your testing should develop a level of confidence in the model portfolio.

6. Determine the best model portfolio for you to use. You can do this using the last the last three months of stock price history or perform a trial evaluation for the next three months of future prices. You can use one of the existing model portfolios or create your own from the stocks selected.

7. Subscribe to an online share broker website and begin trading.

8. Monitor stocks daily and review the performance of your actual portfolio against the model quarterly.

You should take care to evaluate the methodology used by the research website to develop the model portfolios. These portfolios are designed by research firms to provide sensible medium-term portfolios that make it easy for investors and financial planners to replicate. You need to understand the research methodology and develop a level of confidence in it rather than just blindly accepting the published results of each portfolio. You do not need to become an expert in methodologies.

Building a share portfolio that meets your investment objectives will substantially build your wealth over a period of time. You can also save money in commissions and fees, have peace of mind, total control over your investment and gain a real sense of satisfaction.

As a final word of caution...nothing is for certain in this world except for death and taxes. This also applies to the stock market. Be prepared for some ups and downs and be ready to sell stocks to cut losses. If the core of your portfolio is made up of stocks that have strong capital growth and a reasonable dividend you will do well overall. Have "at it" and good investing!

About the Author

August Leo is the owner of AllTradingSecrets.com a fine website that offer free education facilities to their visitors. The other site he maintained is AllTradingBooks.com a complete resources for smart traders. He is also a practicing in Stock & Options Market

Visit the site: http://www.AllTradingSecrets.com and http://www.AllTradingBooks.com

Using Fundamental Analysis for Trading Stocks  

Fundamental analysis, the study of profits, revenue, income, assets, etc. It was the mainstay of stock market investing for decades and decades. Finding a diamond in the rough, was what investors looked for, it is what mutual fund managers use today as their main tool. It is what is done by hundreds, if not thousands of brokerage houses, stock market investor services, and mutual fund managers every day of their lives. Numbers poured over, fed into software programs, then analyzed again. So much so that there is not one single fundamental analysis surprise left to be found in large cap stocks. That is so fundamental to the success of our large cap philosophy (www.livingonlargecaps.blogspot.com) that it bears repeating again. There is nothing new to be learned in fundamental analysis of large cap stocks. Everything is already known. I suppose we should thank the countless analysts who put in countless hours fundamentally analyzing the numbers for us so we don't have to. Because without them, we would have no beginning point. So is that to say fundamental analysis has a purpose? Of course it does. Do we use it? You bet. It is one of the first things we do use. We use in it screens, and we also use analyst's recommendations that are based largely on fundamental analysis. We buy no stock without corroboration of analyst's reports, and many of our screens have an analyst's reports factor to them. So in a sense fundamental analysis is THE most important factor of our selecting stocks. Without a good report from fundamental folks, we don't look any further at the stock. We know stock analysts also have opinions about where the market is heading, and about the sectors as well. We like that too. We want to be where the action is. An exceptional fundamental stock will not move, if people are not focusing on it. And there is the rub with fundamental analysis, and that is why fundamentalist either make lousy traders or don't believe in trading. They are long term investors, philosophically superior to technicians in their way of thought. But stocks only move if they are the focus of traders. (traders for our purposes could be mid-term speculators as well, which frankly is probably where we fit in.) So reading an analyst report, or with large caps you get the benefit of a pool of analyst's reports, gives you an idea whether or not the stock will be moving in the near future (3-6 months.) A stock that is rated a hold is likely not to do much of anything rather than track the market or the sector. A stock that is rated a sell, likely has already tanked. But a stock that is rated a buy, is worthy of a technical look. Do we analyze rates of growth, % of debt, stuff like that? Nope, it has already been done. Our job is to find the hot sectors, and the hot large cap stocks in that sector. And then take those and see if they are poised to move.. Long term moves of an individual stock or the market in whole is a process of thought. But every wiggle and waggle along the way is a process of emotion. A stock poised to rise, based on solid fundamental analysis also needs to have emotion behind it, to actually rise in our time frame. We are not interested in holding a stock with 15% growth rates for a year to see if that results in a 15% stock price increase. The fact of the matter is that stock is going to rise and/or fall 15% in a year's time no matter what. But if we know that it has received high marks for it's fundamentals, and then look at its charts and see technically it is also very healthy then we have something. A stock that does not fair well through analyst's reports is not even worthy of our looking at its' chart. There are so many options in large cap stocks that we want EVERY advantage we can get. We want every selection to be a winner. When your average trade only nets you 4%, you cannot afford to be wrong.

About the Author

CT Larsen has been trading stocks since 1990. Now trading large cap stocks exclusively. He has recorded three straight years of greater than 50% annual returns. You can read his blog at http://livingonlargecaps.blogspot.com.

Investing Stock Market ABC's

While most folks today trust mutual funds and their professional managers with their investments, it's still important to understand the basics of the stock market. Although investing in individual stocks may not be right for everyone, a basic understanding of the stock market is essential to understanding the workings of our economy and business sector.

A stock is a portion of ownership in a company. Commonly referred to as a share, it is a small percentage of the total ownership pool for the corporation. Shareholders are stock owners, or people who have an ownership interest in the corporation. Today, shares are usually tracked electronically, but in previous decades shareholders would actually receive a certificate stating their ownership.

Why own stocks? First, you are sharing in the company's profits. When a corporation shows a profit, they will sometimes distribute these profits to each shareholder, based on how much stock they own. This distribution is called a dividend. Company's can elect to pay out their profits or reinvest them in the company, but as a shareholder, each time a payout is made you will receive your proportionate share.

Also, the value of your stock will rise and fall based on the company's perceived value in the stock market. If you buy a share at $10.00 and it rises to $11.00 a share, you've made a dollar for each share you own, and subsequently sell. However, with this opportunity comes risk as well. If the share price falls and you sell, you'll lose money. The more volatile the stock, the more opportunity for risk or profit.

Most shareholders track their stocks using the stock table. These appear confusing and difficult to read, but they are actually easy to understand with a little practice.

Ticker symbol is listed first. This is the abbreviated symbol that the stock market uses to identify your company. For example, GE is General Electric, WMT is Wal-Mart. Once you select a company, you'll need to know it's shorthand name to track its progress.

Second, the company's name may be listed. Some tables omit the name to save space, others list it to make tracking stocks easier.

The third item is the number of sales in the last trading day. This is listed in the 100,000's, so 256 means 256,000 shares were bought and sold on the last day that the market was open.

Next are the high and low price, in that order. The high price is the highest per share price that the stock sold for on the previous trading day. The low price is the lowest price for that day. Since the price of the shares moves all day long, this is a good reference to see how much the stock is changing in a day.

Next, the closing price is listed. This is the last price that the stock traded for as the market closed. This will also be the beginning price for the next trading day.

After the closing price, the table will list the change, or the amount that the stock changed when you compare yesterday's closing price with the closing price for the day before. This will be listed as a positive number (the stock went up) or a negative number (the stock sold for less yesterday than the day before).

Stock tables are found in many places, but most people check their daily paper or the Wall Street Journal. There are many internet sites that track stocks as well.

Of course, you'll have to select a stock. Choose carefully or consult a professional, and good luck!

About the Author

Jay Moncliff is the founder of http://www.investingreviews.info a website specialized on Investing, resources and articles. This site provides updated information on Investing. For more info visit his site: Investing