Secret #1 - How To Pick The Best Stocks - Part 2
So how do you know what you're buying before you buy it? One simple way to find out is to use "Beta." Beta is a standard measurement of a stock's volatility in relation to the rest of the market. For example, a stock with a Beta of 1 means it has the same volatility as the S&P 500. A beta higher than 1 is more volatile, and a beta lower than 1 is less volatile.
Note: The RightLine Report for Active Traders features both high and low Beta stocks in each issue. Designed for the hands-on person who prefers short to medium term time frames, specific entries and exit details are given for each trade setup. This 3-times a week Report is extremely easy to use and very low risk.
- Market Cap
Another important factor to consider when picking stocks to fit your personal style of trading is "capitalization," or "market cap." Cap is calculated by multiplying the stock price times the number of common shares outstanding.
Companies are grouped as large-cap, medium-cap, small-cap, or micro-cap.
Conservative traders with longer time frames usually don't want too many abrupt price fluctuations. Larger cap stocks with low beta readings usually display slower and smoother price action. If you prefer steady moves through longer holding periods, consider medium or large-cap.
-- Random Selection vs. Precise Targeting
Selecting the best stocks is extremely important, yet only a very small percentage of traders know how to do it. Most people assume that they have at least a fifty-fifty chance of picking a winner. After all, it's sort of like flipping a coin - the stock will either go up or down . . . right?
Unfortunately the simple coin analogy doesn't work. Stock movement isn't
just two-dimensional. Instead of only going up or down, stocks can also
remain in the same price range for long periods of time. In fact, many
stocks spend much of the time drifting along in a sideways direction.
-- What About Mutual Funds?
Unfortunately, even mutual fund managers tend to be lousy stock pickers.
John Bogle - the originator of the Vanguard Group of funds - listed all mutual funds available in 1969 and tracked their performance for the next 30 years. He discovered that you would have been just as well off to pick a fund by throwing darts at the list.
Mr. Bogle's research revealed that investors had only a one-in-40 chance of selecting a mutual fund that was profitable during that thirty-year period. He also reported there was a fifty-fifty chance that the fund picked would be insolvent - out of business - before the time was up.
It seems that most people aren't very good at picking stocks. The best
stock pickers have very specific reasons for choosing a stock. The worst
use vague selection methods and often rely on rumors or "hot tips" for
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