Making Buy Decisions

What steps should you follow before you decide to buy a stock?

Research the Stock

You must do your homework. Be sure the stock or mutual fund is consistent with your investment goals. For example, if you have a dividend reinvestment portfolio, be sure the stock's dividend is secure and increasing over time. Or if you have a growth portfolio, check if the revenues and earnings are growing. Check if the company has any current or past accounting irregularities. If so, avoid the stock.
Buy on the Upside

The Complete Trading Model (CTM) tells us that buying on the upside is a winner's game and buying on the downside is a loser's game. Therefore, buy only on the upside. Do not buy on the downside. Before you buy, use the Price Direction Indicator (PDI) and CTM to determine if prices are on the upside. Read Entry Point to see why buying on the upside ensures that you will make money.
Don't Pay too Much

If you pay too much, you'll have difficulty making money. You don't want to buy near the top of the upside or near the beginning of the downside.

Study the price pattern. If the price is well above its long-term trendline, the stock is probably too pricey.
Check the stock's price-to-earnings (P/E) ratio. If the current P/E exceeds its historical P/E and the P/E of stocks in the same industry, the stock probably is pricey and you should not buy it.

Beware of the Wall Street Buy Propaganda Machine, which attempts to convince retail investors to buy stocks at any price at anytime. Be especially wary of people taunting pricey stocks on TV and in the printed press. They may be trying to convince unsuspecting retail investors to buy a stock because they want to unload (sell) their shares.

For more questions to ask before you buy a stock, see the Buyer's Checklist.