Research

If you want to do anything with the stock market, and assuming you are not a gambler or a psychic, you need to do some solid research to find out which shares you want to trade. Without research, you will basically be guessing and will deserve whatever outcome there is, which will probably not be good.

As with many aspects of life nowadays, the problem is not so much finding the information as sorting through which things that matter and rejecting the sheer volume of less relevant details. You need to build a clear idea of the direction that you are working, and focus in on the appropriate data.

Background research is much more appropriate for investing than it is for trading, as you will understand more when you read about technical analysis later. Nevertheless, it doesn’t hurt to have a good idea about the way a company is being run, the products it makes, and its outlook.

The Press

The pink pages of the Financial Times are a signature feature that has been around for many years, and are for all time associated with the financial markets. Reading simply the Financial Times alone, you may feel overwhelmed by the sheer amount of information available. However, I find that the Financial Times crossword is a little easier than that in The Times (i.e. I can at least attempt to solve it), so there is a built-in source of relaxation anytime you feel you can’t cope.

You should ingest varying opinions, and therefore you should skim through a selection of newspapers. The Financial Times has a special position as the paper of record for the financial sector, but there is a great deal of information contained in many other papers, and some of it may be more accessibly expressed there. No one is able to state definitely how shares will perform no matter what their education or training, so you need to collect several opinions and figure out which seems most likely. No single source is likely to give you the whole picture in a way you can understand.

I remember an advertisement for the Times that appeared in the Underground in the 60s. It ran, “Why should I read the Times when I can get my facts from the opinions expressed in other newspapers?” Obviously, the Times was suggesting that it alone was the newspaper giving facts while other papers merely gave opinions, and it expressed this idea in a very succinct and for me unforgettable way. But it is precisely because you will find different opinions about the stock market that you need to read or at least skim through several newspapers.

The Wall Street Journal is informative for those particularly interested in the American markets, and the Investors Business Daily is suitable for a financial news junkie. There are a number of magazines such as the Investors Chronicle and Shares magazine, which may be worth skimming through on a weekly or monthly basis.

When reading any of these publications, you should be careful to keep in mind that they are written by people with opinions, and that no one knows exactly how the markets will unfold. You will find differing views of the same situation, and must decide for yourself which ones you want to follow. In time, you will gravitate towards the commentators whose views are most in line with yours.

The Internet

It is easy to get lost in the wealth of information available on the Internet. There are literally hundreds of millions of results when you search for an item such as “stock tips” with Google. So you have to be incredibly discerning if you want to find value on the World Wide Web.

That said, many if not all of the newspapers and magazines mentioned above have an online edition, and obviously, subject to the same reservations as applied to the print versions, these particular web sites can be useful.

What you do need to watch out for is social media, chat rooms, forums, and anywhere where opinions can be freely expressed. It is simple human nature to tend to believe what you read or are told in an authoritative way, and we all fall foul of this natural trait. A slick presentation can also add to the air of authenticity. Any open online sources may have opinions from people who really don’t know what they’re talking about, or worse still have a hidden agenda to promote or destroy the fortunes of individual companies and products.

You must learn to be suspicious of anyone apart from people or organisations that you actually know, and which you know to be honest. Every day you will find someone advocating buying or “pumping up” some small company which is about to “rocket upward”. This is an ancient scam, made much easier by the availability of the Internet, where the company or an individual investor seeks to benefit from creating a rush to buy the stocks, thus forcing the price upward by supply and demand. Having thus artificially inflated the price, the scammer then will quickly sell their shareholding, just before the stock price collapses back to its true value. This is sometimes referred to as “pump-and-dump”.

If you receive such an invitation by e-mail, usually you will find that the official looking document recommending the company has, in very small print, a disclaimer at the end, or sometimes a reference to a web site that contains a disclaimer. The disclaimer says that the writer has in essence created a work of fiction, and has no special knowledge that what is written is true. Of course, if the recommendation is presented by a “private individual” posting on several forums, there will be no official disclaimer.

Problems with information from the Internet do not stop with this, however. Any scam you can think of has probably been done. Individual groups or people can set up web sites as stock or Forex brokers so that they can get your personal banking details, and sometimes the web sites will even be copies of authentic brokerage sites. This is easy to do, as the scammers simply have to save the electronic files that are downloaded to any computer when it displays the original site. They can then modify any links and post the files back into their own domain, the name of which can even be selected to look like the authentic version, perhaps with a spelling mistake. Make sure that the address bar shows “https:”, the secure version of “http:” and/or a key or other symbol, depending on the web site browser you are using.

It is common for unscrupulous companies to get their staff or others to post indictments of their competition, running down the genuine brokers so that you’re more likely to use their services. These posts will usually look as though they come from individuals who have received poor service. Know what you’re looking at, and believe little of what you see.

One area where the Internet excels is in getting up to the minute information about trading prices, and for making your trades. Once you register with an online broker, you will get access to the price charts, various reports, and many other informational items. The large and trusted companies such as Yahoo! and MSN have financial sections to their web sites that will also supply information – though once again any articles that you find are probably written by journalists, and in any case can only express the writer’s viewpoint.

Company Information

The Internet is a good source of information that you can receive directly from companies. Log into the genuine company website, and you will find plenty of information and financial statements to assist in your research. If you prefer, most companies will send you a printed copy of their latest reports. We will look at what you can learn from the company reports later on, when discussing fundamental analysis.

Newsletters

Newsletters, subscription or otherwise, once again are expressing someone’s views of the market, and must be viewed with caution. There are many specifically financial newsletters available, and some of them demand quite high subscription costs. It is not always certain that there is any direct correlation between the cost of the newsletter and how good the information is.

The newsletters can provide investment and trading ideas, though you should always validate any perception before staking your money on it. The publishers may seek to impress you by citing rating awards from various institutions and magazines, or by selectively reporting on their historic performance.

If you want to subscribe to a newsletter or two, it is a good idea to start by looking at the Hulbert Financial Digest (HFD). This is not a financial newsletter giving advice, but a well-respected newsletter that reports on the performance of about 180 financial newsletters, rating them in an unbiased manner. It will help you sort out the wheat from the chaff, and should protect you from wasting too much money simply on the basis of well-written sales copy.

As always, the question is, “If you know which companies are going to succeed, why would you waste your time writing a newsletter, rather than simply investing with confidence?” You have to accept that while some analysts simply like to share their expertise, some have less expertise and need to supplement their income by newsletter writing. The HFD will point you in the right direction, and you must always make sure that you agree with any analysis before taking action on your own account, even if the advice comes from a highly recommended newsletter.

Personal Experience

Finally, when you’re looking at companies to invest in, you should just look around you. Some of the best ideas that may be staring you in the face. Is there a toy that all the kids in the neighborhood want for Christmas? What sort of products are you buying on a regular basis?

It may depend on your investing style, but some investors avoid putting any money in companies that make products they do not understand. Some will only invest in products that they personally like and use. The companies that Warren Buffett has invested in through his company Berkshire Hathaway are mainly household names, and well understood by the man in the street. Think of Geico, Mars, H.J. Heinz, Dairy Queen, American Express, etc. This company has averaged nearly 20% growth for the past 50 years, showing that with exceptional stock picking skills you do not have to gamble on high risk small caps for great returns.