The stock market is a precarious place, but there are ways to put a degree of certainty into the stock purchases you make.
For starters, check your stock purchases with a local brokerage house, either one well known locally and with a good reputation, or with the local branch of a national house. In the early days of your investing, work closely with the broker and observe the materials and sources he uses and the essential points in a stock he looks for. But you cannot rely on any broker to pick out your stocks and sell them for you.
You and only you can do this -- with the advice of a good broker. Possibly when you are locating such a broker you can ask him to tell you of several of his satisfied customers with whom you can talk. Brokers, like other people, sometimes have stocks to unload or are interested in building a market in a stock because they have a lot of it themselves.
You have to guard against being the victim of this type of promotion, and you can do this only by making the ultimate decision to buy or sell yourself, with all the facts at hand and with the advice of the broker. One of the most useful services he will perform for you is to pick out for you from the thousands of stocks traded, a workable number for you to consider. It is a hopeless job for one not used to stock dealing to pick a few stocks out of all those offered.
When you buy, do not buy just one stock. Buy four or five at least. The most sophisticated professional can often do no better than pick seven winners out of ten selected. Suppose he had bought only the wrong three that he thought were right at the time he bought them!
My own system of investing is a simple one and is not based on any rule of purchase. Unless I know a company thoroughly and how much of its stock is out and how much overhanging the market in the form of options or founders' stock, I do not usually invest. I have found that without securing as much inside information about a company as I can, I run a great risk. Inside information comes directly from the management or one step removed from the management. Hearsay information is of little use, particularly that which comes from brokers, unless the broker knows the management and gets his information directly from it.
The exception to the rule concerns cyclical stocks. These are stocks of companies whose well-being depends on the ups and downs of business. Cyclicals are well known and are generally the heavy industries, both producers' goods like machine tools and consumers' goods like automobiles. They feel the effects of recession and depression more than any other industries.
In a recession they fall the most and in a comeback they rise the most. In order to play cyclicals you must watch the trend of business like a hawkthe New York Times Index, the Federal Reserve Index and other measuresand read the business section of the Times, the Wall Street Journal and Business Week, among other periodicals. You cannot hope to get the turning points either at the bottom or at the top, but you can recognize the early stages of a trend when you see them.
New investors might be overwhelmed with the amount of information they must read and absorb to make sure their stock picks stay on top, but all that extra reading pays off. Without the proper information about company earnings, and predictions about when a company might file for bankruptcy or have to defend against a large law suit, investors can be caught completely unawares. In that case, bad things can happen indeed. The informed investor will always have an advantage in the stock market, and after several months, reading the numbers will become second nature to the successful investor.