While the pandemic has disrupted the global economy, the stock market and many top growth stocks have rebounded to new heights. This volatility may leave new investors wondering how to invest in stocks as we head into 2021.
Does this roller-coaster volatility change the basics of how to invest in stocks? Will the stay-at-home, work-from-home and online classes phenomena last? And for people just starting out, has this new environment altered investing in stocks for beginners?
Over a hundred years of stock market history shows that while the company names and technologies will change, the time-tested principles of how to invest in stocks remain essentially unchanged.
Investing In Stocks For Beginners: CAN SLIM Growth Stocks
In the early 1960s, future Investor’s Business Daily founder William J. O’Neil asked a simple question: What do the best stocks look like just before they make their biggest moves?
To find the answer, O’Neil launched a groundbreaking, ongoing study, looking for common traits shared by the best stocks. He found seven.
Those traits form the basis of what is now known as the CAN SLIM Investing System. The concept behind CAN SLIM is simple: To find the best stocks to buy and watch, look for stocks displaying those same seven traits right now.
Using CAN SLIM as a blueprint for a stock-picking checklist helps investors identify the best stocks to watch early in their runs. Stock lists based on the CAN SLIM system have continued to dramatically outperform the S&P 500 year after year.
As stock market leaders like Apple, Microsoft, Amazon, Zoom Video, DocuSign, Chegg and many others have made their big moves, they’ve all displayed CAN SLIM traits and appeared on IBD stock lists.
So for new investors wondering how to start investing in stocks, start by learning the seven CAN SLIM characteristics. Together with tracking stock lists like the IBD 50, IBD Long-Term Leaders, Sector Leaders, IBD Big Cap 20 and IPO Leaders, following the CAN SLIM system will help you identify the next crop of stocks to watch.
Here are three basic rules to help streamline and enhance your search.
How To Invest: Only Buy Stocks In An Uptrend
Here’s one of the most important tenets of investing in stocks for beginners and seasoned investors alike: Only buy stocks in a market uptrend. Take defensive action in a weakening stock market.
You can identify the current market trend by regularly checking the Market Pulse in The Big Picture. Each day, the column shows you which of three possible stages the stock market is currently in: Confirmed uptrend, Uptrend under pressure or Market in correction.
Over 100 years of stock market history shows that three out of four stocks move in the same direction as the general market. You don’t want to fight those odds! Instead, learn to stay in sync with the market and only make new buys when the odds are in your favor and the indexes are trending higher.
As AAPL, MSFT, AMZN and virtually all leaders got hit in the coronavirus crash, the importance of this one rule is clear. The quick and remarkable stock market rebound beginning in March 2020 only reinforces that tenet on the flip side.
While many people new to investing in stocks focus on individual companies, understanding general stock market trends is critical. So before considering which stocks to buy, first make sure you understand the current stock market environment.
How To Invest In Stocks: Identifying The Best Growth Stocks
After understanding current stock market trends, focus on stocks with big earnings and sales growth driven by new, innovative products and services. These traits entail the first three letter of the CAN SLIM system: C — current earnings, A — annual earnings and N — new product, service or industry.
Stocks like Apple, Microsoft, Nvidia, Zoom Video, DocuSign and countless others become big winners as they post exceptional earnings per share and revenue gains.
These gains typically come from companies that are flashing something “new” — a new product, new management, or a new industry trend. This can also apply to IPO stocks to watch like ZM stock and DOCU stock have that have gone public in recent years.
Growth stocks that gain 50%, 100% or much more in a short period of time do so for a reason. That reason is usually because the companies are strongly displaying the CAN SLIM traits, particularly the C, A and N.
Which Stocks To Buy: Buy Stocks The Best Funds Are Buying
Another key factor for successfully investing in stocks is to buy stocks being heavily bought by large, institutional investors, and avoid those they’re selling aggressively.
Mutual funds, pension funds, banks, and other large money managers account for the bulk of all trading in the market — not individual investors. Since these professional portfolio managers have the power to significantly move a stock up or down, it’s crucial that you pay attention to what they are buying and selling.
Each month, you’ll find a list of new buys by the best mutual funds. To increase the performance of your own portfolio, pay close attention to where these leading money managers are investing their money. For example, in the latest report, top funds invested heavily in AAPL, NVDA, MSFT, DOCU and ZM stock, just to name a few.
You can also see what fund managers are investing by using stock charts to track the price and volume action. With stock charts, you can get a truly objective look at the health of your stocks, without relying on rumors or hearsay.
Investing For Beginners: Start With This 3-Step Routine
Once you have a basic understanding of how to invest in stocks, put them into practice with this simple and streamlined three-step routine. By following these steps, you can track stock market trends, find stocks to watch with the most important CAN SLIM traits, and see which stocks the best mutual funds are heavily buying (or selling).
The key is to follow the routine regularly. It will help you stay in sync with the market, identify ideal buy points, and get a timely look at the best stocks to buy and sell.
Learning how to invest in stocks takes time. But you can shorten the learning curve and stay profitable and protected by following these basic, time-tested rules.
Follow Matthew Galgani on Twitter at @IBD_MGalgani.
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