Secret #1 - How To Pick The Best Stocks - Part 2


green maze -- Volatility

Yes, stocks have personalities. Some are peaceful and predictable. Others race up and down the charts in explosive price moves. You want to know whether a stock is calm or hyper -- BEFORE you get in. Why? Because if you are a relatively calm person and buy a stock that bounces around like a 2-year old, you're probably going to be stressed out trying to keep up with it. On the flip side, if you are super-energetic and always ready for more action, a calm stock will be too boring for your personality.

- - - - - - Pages Index - - - - - -
The Five Secrets: Intro
How To Pick The Best Stocks
How To Pick Stocks. . . Part 2
How To Win In Any Market
Enter & Exit at the Right Time
Maintain A Winning Edge
How To Control Risk
The Five Secrets: Conclusion

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.

hi beta
Extremely short-term traders usually benefit the most from very volatile stocks that exhibit a tendency for sharp daily and intra-day price movement.

This type of trader will usually prefer stocks considered "high beta."

As a rule of thumb, the shorter the time frame you prefer, the higher the beta you would choose.


low beta

Low beta is generally considered to be safer than high beta. Traders with conservative styles and longer time frames will normally choose lower beta stocks over high beta.

Low beta isn't an absolute safety gauge. However, stocks in this group do tend to work well for people who are more interested in steady long-term growth than in explosive short-term gains.

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

trading stocks for profits 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.

market cap Companies are grouped as large-cap, medium-cap, small-cap, or micro-cap.

Studies show that the majority of stocks that increase in price by ten times or more are "small-cap" or "micro-cap." This is often due to the relatively low number of shares available. As demand for the stock increases, the price rises dramatically. If you want big explosive moves, think small-cap and high beta!

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

fingers point 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?

sideways drift 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.

Unlike a coin toss, randomly picking stocks doesn't provide an even fifty-fifty distribution of winners and losers. Choosing stocks successfully is more like shooting tiny moving targets the size of houseflies with a BB-gun. You can see how important it is to be precise.


-- What About Mutual Funds?

Unfortunately, even mutual fund managers tend to be lousy stock pickers.

target 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.

mutual funds 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 their picks.

Just remember that picking the best stocks means finding stocks that fit YOU best. Whatever your trading style and methods, you'll make more money when trading stocks that fit your specific criteria. The less capital you have, the more important this becomes!


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