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In the previous article we discussed the advantages and disadvantages of online trading. This article will focus on how to choose stocks in your online brokerage account.

Online trading is buyer beware! Since you are the one deciding what investments to buy and sell and when to buy and sell them, ultimately the reward or burden falls back on your own checkbook. That’s why it’s very important to start small and get comfortable in the game before you invest serious money. By “serious money” I mean anything other than an amount you can afford to lose (i.e., can you still afford to eat three meals a day if you make a bad stock selection as you’re learning?)

Your Own Bright Idea

It all starts with your own bright idea. Stock selection, for most, is based on personal preferences and decisions. While there are key statistics to research in a stock (as we will discuss shortly) the initial process begins with your own research and thoughts.

Think about where you like to shop, what you like to buy, what you think is the “next big thing.” Pay attention to the world . . . are you noticing fewer people in line at Starbucks for coffee and more at Dunkin Doughnuts? Do you see a fashion trend in precious metals from gold to silver to platinum? What are the noises, feelings and thoughts of the people all around you? Consumer spending accounts for 2/3 of our country’s economy, so what people are buying (or not buying) is important.

For example, a few years ago I began to notice how often I found myself shopping at Target. I bought everything there. Clothes, shoes, greeting cards, food, medicine, electronics. It truly became my one stop shop. My shopping experience began to change as I focused more on my surroundings and the company from the ground up.

I noticed what a wide variety of products they had in various price ranges. I noticed there were customers of all ages, ethnicities and social classes. I could never find a parking spot and the employees were friendly and knowledgeable. After more research, I bought stock in this company.

That’s an example of how the idea can start from within. Then we move on to the more fundamental research components of stock selection.

Research your way

The good news is there is a plethora of information online to research stocks of various companies. Some good sites include finance.yahoo.com and bloomberg.com. You can also get on the company’s website to read press releases and earnings reports.

Understanding stock-world vocab:

Price: This is the price it will cost to purchase one share of company stock. A share of stock is literally an ownership interest in the company.

Price Range: This can be shown for the day as well as 52 weeks. The high and low will be shown.

Change: The difference in price from the previous day’s closing price.

Bid: What a buyer is willing to pay for one share.

Ask: What a seller is willing to sell one share for.

EPS: This is essentially how much of the company’s profit can be allocated to each individual share of stock outstanding.

P/E: This is the Price to Earnings ratio and is the price of the stock divided by EPS (see above). This number can be an indicator of whether the stock is expensive or cheap.

Dividend Yield: This ratio shows how much of a dividend the company distributes to shareholders relative to the stock price.

You can also view company news, message boards, insider transactions (whether key officers are buying or dumping their own shares) and various historic price charts. Learning which statistics are important and beneficial to your research process takes time and trial.

In the next article, we will walk through how to purchase a stock online and when a stock might be a good “sale candidate.”