- Narrowing the range of stocks to research

- Understanding the limits of research

- Finding your comfort level with research

- Locating reliable sources of information on stocks

- Developing a sense for investing in stocks

Enough of the preliminaries, you know the risks of investing, and you’re willing to live with them. What comes next? Now is the time to begin researching your stock investment options. You have over 10,000 listed stocks to sort through and narrow your choice to maybe 25 to 50 to take a closer look at. Before you begin to feel a bit overwhelmed, there are two things to keep in the forefront of your mind. First, there is no magic or correct number of stocks to research. You may find two or three very promising stocks in your first hour on the Web or in the library. Second, researching stocks is not like solving a math problem. You should be looking for a few good or very good stocks to invest in, not the perfect stock.

Narrowing Your Choice of Stocks

With so many stocks to invest in, you need to narrow your focus down to a manageable number of stocks to research.

Why do you need to do this research? You will want to make sure you have all the information at hand to make the most informative decisions on where to invest your hard earned money. Early in your investment career you learn that researching and finding a few good stocks to invest in is a process that never stops. For now, you should narrow your search to 100 stocks if you’re working on the Web or 50 if you’re working with print media sources. If 50 seems too many, settle for 25 stocks. Begin narrowing the field by deciding that you’re only going to buy stocks in companies that you understand. This is a key rule to follow. In order to invest in pharmaceutical companies, you don’t have to be a biochemist, but you do need to have enough knowledge about what the company does what its main products or services are to have a real sense of whether it is likely to be profitable in the long run.

Narrowing the field

With 10,000 stocks to sort through, narrowing the list to only 100 (or whatever other number you want to work with) means that you select only 1% or fewer of all stocks as worthy investment candidates. To get anywhere in this process, you need to settle two issues:

- What will your investment strategy be?

- What screening techniques will you use?

Determining your investment strategy

Review what you learned in Chapter 3 on rewards and risk. Review your investment goals you compiled in Chapter 1. Now ask yourself, “What will it take to get me to my goals?

Don’t just plan your investment strategy in your head. Put your answers on paper. That will bring a much better focus to the task of settling on a strategy so that you can start making choices. I can’t walk you through every investment strategy out there because the options are endless. However, having a sense of what you want financially and how much risk you are willing to take considerably narrows down your choices.

- More conservative strategies focus on the mature, very large companies that make up the Dow Jones indexes of industrial companies, utilities, and transportation companies. Nothing is wrong with this strategy, and it has worked well for many people. Check with your library or the Web for the names of the 65 companies that make up the Dow. You may find just what you’re looking for.

- A less conservative but not totally adventuresome approach may be to check stocks of large cap companies but exclude very large stocks (for example, those over $5 billion in market capitalization). You can use an Internet stock screener to select stocks only in the $1 to $5 billion range using techniques that I describe in detail later in this article.

- More adventuresome strategies include mid cap or even small cap companies (refer to Chapter 2 for definitions) whose growth is likely to be more rapid. Again, nothing wrong with these strategies as long as you understand the risks. If you’re working on the Web, using a stock screener can help you locate companies within a specified range of market capitalization. You simply enter a value or range, and the Web site comes up with a list of potential stocks. I explain using stock screeners later in this article.

If you’re working with print media, a shortcut that is not precise but good enough is to consider companies listed on NYSE as large cap, and companies on the Nasdaq national market list as mostly mid cap. Most papers also present a daily list of Nasdaq small cap stocks. Stock selection is what systems analysts call an iterative process. You are going to go back over this subject many times in your investment career. What you learn on each trip back may lead you to modify and improve on decisions you made previously.