Selection Criteria for Stocks

Most investors have their own philosophies that drive their decisions about where to put their money. Years of research, analysis and philosophizing have not provided a way to make sure-thing investments and beat the market every time. However, by setting up a system of criteria for determining where you will put your money, you give yourself the best possible chance of making informed decisions and profiting from your investments.

Company Fundamentals

Although it's not a guarantee of stock earnings, the first thing to look at is a profile of the company itself. In general, a company that has a business model that you understand and believe in is a good place to start. Companies that are well run, have a good product and have wide appeal to the general public typically are good bets. Investing in industry leaders and respected brands is one of the best ways to ensure good, consistent earnings in the stock market. Although sound businesses can take hits and total sham companies can grow rapidly, making an informed decision based on the fundamentals of a company provides a solid foundation for smart investments.

Company Trends

While it's important to know what the company is doing and how it’s run, it is also a good idea to look at the historical performance on the stock market. Although stock market analysts know that past performance is not a guaranteed indicator of what the future holds, it is one of the best ways for you to make a realistic decision on where to put your money. A company that has grown steadily in value over the past 20 years, for example, is usually a fairly safe bet. A company with turbulent ups and downs can provide you with reasonable expectations of what the future holds. Charts of company stock earnings can also help you decide what price you want to pay for the stock.

Mass Psychology

Some investors believe that the basics of a company don't matter, since the only important factors are buying and selling at the right time based on market predictions. Mass psychology is used as a way to predict the flow of the market. For example, bad news about the economy might prompt a large scale sell-off of certain stocks. On the other hand, a growing cultural trend or fad might make a once obscure investment skyrocket. This type of analysis says that the only criteria that matter are what people are going to buy and when. If you can predict the behavior of other investors and stay a few steps ahead of the investing public, you are sure to win.

Diversification

One old and well-respected tenet of investment is diversification. This doesn't work for every investor, but it makes sense depending on what your goals are. The argument holds that, since the market as a whole is moving in an upward trend, the best way to tap into this growth is to assemble a diverse portfolio of investments that represents the economy as a whole. This strategy seeks to minimize risk, with the drawback being a possible stifling of quick growth. If the market average for growth is appealing to you, this is the way to go. If you're looking to beat the market, another approach might be riskier, but possibly more rewarding.

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About the Author

Linda Ray is an award-winning journalist with more than 20 years reporting experience. She's covered business for newspapers and magazines, including the "Greenville News," "Success Magazine" and "American City Business Journals." Ray holds a journalism degree and teaches writing, career development and an FDIC course called "Money Smart."

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