Sound Stock Investing Principles
It was just after the stock market crash that ushered in the Great Depression that many investors learned the concept of fundamental analysis. Stock investing is not gambling. Smart investors seek to understand the factors that will drive a stock price up or down. They look at the price to earnings ratio of a stock to see if it is a good buy or has been over-bought. Savvy investors look at the intrinsic value of a stock and its margin of safety. These are sound stock investing principles. A company with fundamentals that predict continued growth is a good long term pick. A company that has a good margin of safety in the form of property, inventory, and low debt will remain strong throughout an economic downturn. Sound stock investing principles dictate that long term investors seek both growth and safety. To achieve what sound stock investing principles require takes homework and attention to detail. The reward is a healthy stock portfolio.
Paying Attention to the Portfolio
Many believe that the days of buy and hold investing are over. In fact, there has never been a time in which one could safely buy stocks and ignore them. Dividend stocks should keep paying dividends and growth stocks should keep growing. Companies with a low debt to earnings ratio should not be taking on debt. A good rule of thumb is to limit the size of a stock portfolio to the number of stocks that one can easily check on at least every month and ideally once a week. Sound stock investing principles dictate that you the investor know what is in your stock portfolio, what you expect of that stock, under what conditions you will sell it, and under what conditions you might choose to purchase more of the same equity.
Building a Stock Portfolio over Time
Let us say that you have several stocks in your portfolio and they are all performing as expected. Now you have the question of how to invest 10000 dollars that you have earned from a nice bonus at work or maybe from an inheritance. Do you want to look for another stock? Do you want to further diversify your portfolio? Do you simply divide the money and add an equal value of stock to each portfolio? Maybe you want to invest in a penny stock that you believe has the potential for exponential growth. What do sound stock investing principles have to say about our choice? The older you are and the closer you are to retirement the more careful you will want to be with your stock picks. If you are going to pick a new stock it should probably be in a different sector than what you currently have. And, if you are going to invest in penny stocks be aware that you commonly need to buy around forty risky stocks in order to get one great winner that balances out the loses that one would expect in a herd of penny stocks.