Everyone you talk to including your Uncle Dan has a winning system to make money in the stock market. It seems there are as many systems out there as there are people. The question is, how does a novice beginner make sense of it all. How do you mitigate the risks and how do you pick the correct stocks.

The first thing to do is to learn what works for you. Just because Uncle Dan has a can’t miss system, it may not be the best for you. Do some research. Try some ideas. Some sources advocate using paper trading sites to finesse your trading system. This is where you do not actually trade with your money. You are given some paper money and you go up against other traders to see how well you can do. This is a good process for deciding what will work for you. One drawback of this process is that if it is not your money, you have no emotion in the outcome. It is easy to pull the trigger when it is not your money. You may do quite well with play money and not so well with your money.

That brings us to the next part of the equation. After you determine how you are going to pick stocks, what will determine when you enter the market and what factors indicate to you to exit a particular stock, do not let emotions tug you in a different direction. You need to follow what has worked for you in the past. Too often when our personal financial stake is at risk, we fall apart and are unwilling to pull the plug or make the plunge. Leave your emotions in your back pocket when you invest.

In determining when you should buy a particular stock, you must first determine what type of stock you are investing in. Growth stock expect the high rate of stock price growth to continue. Value investors are looking for stocks that are undervalued for the amount of earnings the company has or is expected to have.

The p/e (price earnings ratio) which is calculated by taking the price of the stock divided by the earnings per share is a good determiner of the value of a stock. Some stocks may be a good buy even though their p/e is above 20 while others may not be a good buy with a p/e below 20. The thing you need to look at is how the company compares to other companies in their industry and what the historical p/e has been for the company. So the answer of when to buy a stock is when the p/e is lower than its peers and you can not find anything wrong with the company.

Proper analysis is the correct method to use when determining the stocks to purchase. Buying on speculation rarely wins. Someone gives you a hot tip. Run from that situation. If a stock is expected to boom but does not have the earnings background to support the expected price, it is not worth the gamble. It may go up but eventually will come back down. This is known as “pump and dump”. Those giving the tips are trying to pump the stock up so they can dump. Don’t fall for it.

So even though there are many different trading systems, probably the correct system is to determine the types of stock investments you want to concentrate in, do sound analysis, perform proper asset allocation in your investments and then go for it.

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