Investing in Individual Stocks

Picking the winning stock out of a line-up can be an exciting thrill ride that can yield great profits- two reasons why so many investors opt in to investing in individual stocks. You never know what is going to turn into profit making news next. What the next hot product is? First a company will trigger your profit watching senses. Then you'll do some research to weed out the fluff from the good news, and maybe with some bit of luck you end up saying "That's the one I've been waiting for".

What does it take to pick the next winning stock? It's not a "pin the tail on the donkey" process. It's not some random type of lottery. You have to have some degree of experience and stock analysis tools under your belt. Of course investing in individual stocks can be riskier than investing in a mutual fund, but it can be more rewarding as well. Finding the winner can be done, but do it wisely.

Common stocks, which provide actual ownership in a company, can be classified in three different groups. Growth stocks are shares in a company that expects to experience strong earnings growth over the coming years. Blue chip stocks are shares in a company that is fairly well established like Boeing, or General Electric. Small cap stocks are shares in a company that has a minimum total market share.

Generally the greater the risk, the greater the return, and small cap stocks may show greater growth potential; however small cap stocks will generally be more volatile. Blue chips stocks, on the other hand, have been around for a while and generally will show less of a risk as well as a more stable return.

When investing in common stock, you essentially own part of the underlying company and you will share in the ups and downs of the profit that company experiences. Your investments success or failure directly depends on the success or failure of the company you choose to invest in. But the "warm and fuzzy" notion of owning part of the company provides some assurance that if the company does experience a loss, or a down period, you will also share in possible future profits. Keep in mind that generally the greater the risk the greater the return. This could mean that smaller companies could have more of an explosive growth pattern yielding greater returns. Larger companies might show a more stable pattern of returns. So what are the basic ground rules for picking individual stocks?


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