The basics of wise investing -5 answers to common questions

There are numerous courses on the internet for becoming a good stock picker, for improving trading, learning fancy jargon, new techniques etc. This blog entry is not about any of that. I'll be dealing with fundamentals that will help anybody, of any age, pick market beating stocks.

5 key Questions answered in this blog entry

Why do stocks go up?

Why do stocks go down?

What sector is the best to own?

When should I sell?

When should I buy?


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Why do stocks go up?

Stocks can go anywhere in the short term. What many people get confused with is what the stock price is. Many of these folk believe that the stock is the business, and consequently when the stock goes up the business is doing well. Not true. To find that out you need to know about the company.

There are plenty or reasons that stock prices fluctuate. The main reasons, though, are mass buying and selling. The two main causes of this are 1.the public are buying/selling 2.the institutions are buying/selling. So why do these two groups of people mass buy and sell? Generally they react to short term findings, trends, beliefs, hocus pocus, what ever is the current 'in thing' etc. As Benjamin Graham mentioned in his classic called Intelligent investor, the market prices securities differently everyday, sometimes they are priced correctly and other times not, depending on the feeling of Mr Market.

A good example of this is any stock related to the credit crisis. They've been hit hard, I think too hard, but we'll get onto that.

So massive moves in stocks tend to happen when the public, institutions and to some extent large shareholders, buy or sell. This produces large highs and lows, even in so called 'blue chip' stocks. Why do these people buy? MOST people buy because of what they see as CURRENT trends and what they think will happen (short term). So most of the investment community are down on investment banks, banks and property firms etc because they think the current trends indicate these stocks will do badly (in the short term).


Why do stocks go down?

There are lots of reasons:

- People sell.
- Stocks can also be split, or new shares added, diluting the value of the current
shares
- Missed earnings reports
- individuals taking profits
- bad 'feeling' about the stock
- a stock losing flavour
- short selling by institutions
- fall out of favour with the big boys (institutions)
- Did i mention people selling?


What sector is the best to own?

I personally don't think there is any one good sector. The best companies to own are the ones you know about and the only the ones that you think are likely to do well in the future based on your own research.

When should I sell?

This depends on you. It is always up to you. Remember though that there should be a good reason to sell. 'Its gone up' does not count. Likewise, 'Its gone down' doesn't count either. I agree with Peter Lynch on this one, only sell if the story worsens(all companies have stories- are you following yours?).

For example: The story of the British banking sector. US stocks have been pummeled due to the credit crisis. Some UK banks have been affected. Earnings, in RBS, have increased significantly over the past 5 years. Strategic acquisitions have heightened the stocks appeal and it has expanded, with good margins. Its stock has taken a hit, its dividend is close to 10%. Has the story changed? Not really, the earnings have been hit, but will likely bounce back (I can't know when, investing isn't an exact science, don't believe anyone that says it is- they are trying to con you/impress you/ get money out of you- or all three!). Should I sell my banking stocks- depends on the story. If its RBS- I'm buying.


When should I buy?

When there are opportunities to buy good businesses cheaply. This isn't my tactic, its Warren Buffett's- the worlds greatest investor. Oh, and Peter lynch used it when he worked at fidelity (No.1 fund manager in the 90s). Examples? Some companies have been hit by the credit crisis. Some are good companies, with good stories. Check out the story. If its good and its going cheaply, buy.

See my other posts on when and what to buy, as there is more to investing your hard earned cash than this one post.

Good researching! (would say good luck, but there's no real luck involved in wise investing)......