There are a lot of people who are quick to put down investing in the stock market. They will point to Enron or Ponzi schemes and spout about fools investing and the greed of brokers and those in the financial community. On the opposite end are the people who are so eager to be in the market that they don’t see the forest for the trees. Or more accurately they see the mighty sequoia and neglect saplings that will grow into mighty oaks.
Had enough tree talk? Good, then we’ll get down to business. How do you decide what stocks you are going to buy? What factors influence you, or do you just go with whatever your broker (or your next door neighbor or the guy at the water cooler) suggests? The real question is, do you have a system to analyze what you are considering?
What are the important deciding factors that determine if a stock is going to rise or fall in price and is that all you should be concerned with? The loud and clear answer is no. If all you are doing is looking at the share price that’s like buying a car (also an investment of sorts) by picking a color. It might be pretty or whatever, but how’s it going to perform over the long haul? Looking into the company is akin to looking under the hood of a car. Doing research is the key to finding out the long term prospects of either one.
What does a company do? That’s a real key to this decision. It’s all well and good to analyze the price and its 52 week fluctuation and the patterns over the years and whatever else you want to consider, but long term (and sometimes even short term) it’s about ownership in the company, so you have to look at what they do and how they fill their share of the market.
For example, I used to recommend a company called Zebra (Nasdaq ZBRA) which fluctuates between 18 and 30 dollars a share. It has been doing that for a while, and if you work the timing, it was fairly easy to make money buying low and selling high. But to me the most attractive thing was that the company made industrial printers that were used to make bar codes and things for manufacturing facilities and logistical companies, and they dominated the market share. Most companies used Zebra printers and their supplies. That last part was the key. Printers are fairly inexpensive, and the supplies get re-ordered over and over. The printers are also very reliable, so companies tend to stick with them.
What’s the lesson? Solid value in a company that’s been around a while, and has a large share of the market. They are not going anywhere and will retain their value – at least until a technological upgrade comes along – and I’m sure they are working that angle as well. The point isn’t to buy stock in Zebra; the point is that stock means you are buying part of a company and you want to make sure you check under the hood.
Making money with share price is one option. Another option is finding stocks that pay dividends. All the points above still apply, but a second stream of income comes from annual payouts that the company makes from shareholders. You can search for these companies or you can go to the S&P Dividend Aristocrats. If you can find companies that match the criteria above plus are in the Aristocrats category, you are golden.