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Stock Market Basics – Part 2 The establishment of a company requires that we learn stock market basics and how to evaluate stocks for investment purposes. In order to raise money the company goes through quite a process to make their stock available for purchase. The question is after the Initial Public Offering or IPO, what are the reasons to consider buying a certain stock? There really is only one reason to buy any type of stock. You want to make money. That’s it. Buying stock in any company does not do that company any economic good. That only happened at the IPO. If you buy stock in a very large well established blue chip or a small cap tech firm, you are buying that stock from some other investor. So why do it? There are a variety of reasons why investors pick a certain stock. The thing to remember is there are exceptions to almost every rule. So let’s start with the “fundamental” approach. This method involves a review of the company’s current financial picture versus it’s competitors. It reviews market share, profitability, book value and a variety of financial factors. Much of this information is widely available on the internet and at other sources. The problem with that can be shown with the following examples: Cisco and Intel. In the 90′s these were some of “THE stocks to own”. These plummeted when the tech bubble burst and have floundered since. However, both stocks are still leaders in their industries, both have huge profit margins and steady growth in sales. Their fundamentals say that these stocks should be growing steadily but they are not. Why not? The technical analysis says that stocks follow specific repeating patterns. In other words, Cisco and Intel should have taken off by now. But they haven’t. Then there is the hot tip. These are stocks that have some new technology or patent that makes them a “sure thing”. Bioject Medical Technologies has a needle-free injection system for vaccines. Who wouldn’t buy that equipment? Their stock which was in the mid $ 30 range in the 90′s is now trading for 35 cents a share. If these ideas aren’t working what is? A stock’s value can be affected by a number of things. In reality, it probably does NOT matter what affects the price, only how you respond. The price of stocks goes up and goes down. Always has and always will. That’s stock market basics. Before you buy any stock, determine your limits. If the stock drops immediately, define when you will cut your losses and sell. Then do it! If a stock begins to rise, raise your sell price. Every time it goes up, raise your sell price. Remember, when a stock begins to drop, the bottom is zero. And all stocks will drop at some point. When you sell, try to determine your profit. If you are able to grow your investments at a rate that is greater than taxes and inflation, you are doing well. If you are not doing that well, then you need to consider how you are selecting your stocks. More on that later, but the key principle in stock market basics is to make a plan and stick to it. Dwight Declet has been a licensed stockbroker since 1985. He works we people planning for retirement and those already retired. Through his experience in the stock market he has helped over 700 clients successfully “grow money.” You may visit his site and seek his advice at: http://prp401k.com Tags: Basics, Market, Stock View this post on my blog: http://stocktips.valuegov.com/stock-market-basics-part-2/