Selecting Stocks

THE FAMOUS BULL NEAR WALL STREET

THE FAMOUS BULL NEAR WALL STREET

There are probably more than 10,000 stocks you can buy for your investment portfolio. There is no way you can investigate each of these stocks to see which ones are likely to increase in value. Our general view is that Teenvestors should invest in what they know and in products in which they have an interest, at least at the beginning of their life-long investment efforts. The important thing is to get started buying the stocks of big companies that will be around for a long time.

It is also important to make a habit of investing in stocks at regular intervals. Once a month, two times a year – it doesn’t matter as long as you make it a priority to put your money in stocks that are likely to grow.

As a beginning investor, you should try as much as possible to stick to the companies in the Dow or the largest companies in the S&P 500. However, if you have trouble getting motivated, we have a few suggestions to help you decide which stocks to consider buying after doing some fundamental research described in this section of the website.

The Businesses In Which Your Relatives Work
Unless your parents work for the government, you can get good investment ideas by talking to them about the companies and the industries in which they work to see whether these companies are good investment opportunities. They can tell you whether their companies are doing innovative things that will make for attractive investments.

Ask your parents to show you any annual reports or brochures the company produces for the public. Your parents can give you some insight on the trends in the industry, the competitors, and the general feelings of the employees in the company. Keep in mind, however, that there is a limit to the information your parents are allowed to pass on to you. This is because employees who come in possession of material non-public information (called insider information) cannot benefit financially from that information.  

Don’t just stop with your parents. Your other relatives, your neighbors, and your friends’ parents have a wealth of knowledge you can tap to learn about what is going on in different industries. They can alert you to trends before everyone else knows about them.

Make a habit of asking about the businesses they are in and about any exciting products or services their companies are developing. Once again, you can ask these relatives and acquaintances about annual reports and other publicly available information that may help you understand the industries in which they work.

Speaking of friends and relatives, you should do your own research before making any purchases. Some people have a habit of boasting about their great investments without mentioning their losses in the market. There are no sure things when it comes to investing in the stock market.

Consider Your Hobbies
Hobbies are often a good place to start looking for investment opportunities. If your hobby is collectibles, for example, you may be interested in learning more about companies that specialize in sports memorabilia, art, toys, and other collectibles for hobbyists. You can probably find a stock associated with any kind of hobby you can imagine. If you like longboarding, you can find a company that makes the equipment, the pads, and other items associated with the activity. If you like sports, there are lots of publicly traded companies that make sporting equipment.

To recap, our philosophy is that following your interests is a possible way for you can get motivated to begin investing. You may not make any profit and you may even lose money, but this will at least get you acclimated to the market. When you become an experienced Teenvestor, you can then move on to investments in big companies that look promising – whether you have a passion for those businesses or not.

Look To Your Friends and Classmates For Ideas
Other young people are excellent sources of good investment ideas. Just by observing what your friends and classmates love to wear and eat, you can see some good investment potential. The entertainment they choose and the beverages they drink can also be a clue to the right stocks. For example, if you notice that your classmates prefer energy drinks, perhaps this is a sign that you should look more carefully into the stock performance of companies that make such beverages.

Look around your school for items that are popular among your classmates. Look around your house for products, foods, and gadgets that your family prefers. Ideas are everywhere. Don’t limit yourself to just what is in your immediate environment. The only things to watch out for are items that are too trendy, because they will probably fade away in a year or two.

Start Reading Business Publications
Teenvestors should read business publications available in print or online. Fortunately, 13-year olds can read and understand most general business publications. We knew an 11-year old who read The Wall Street Journal regularly.

We believe The Wall Street Journal should be required reading for every Teenvestor. Go to the publication’s website and just review the short article summaries if you don’t have a paid subscription – you are sure to absorb something from this great publication.

In addition, high-quality business news aggregators and publications such as Yahoo!Finance, Marketwatch, Investopedia, Forbes, and Fortune can be great resources on new companies and trends you should explore for investment ideas. These publications can often save Teenvestors lots of research time because they publish detailed, up-to-date articles on some of the biggest companies in the United States and around the world.

There are also some relatively new publications such as TechCrunch, GeekWire, and VentureBeat that specialize in articles about technology companies. Although we feel that high-technology investing is for the advanced Teenvestor, you may want to sample some of these magazines as well.

Here is a list of some news and information sources that will help anyone age 12 or older to become a true Teenvestor:

The Wall Street Journal (wsj.com)
Yahoo!Finance (finance.yahoo.com)
MarketWatch (marketwatch.com)
CBS Moneywatch (cbsmoneywatch.com)
Financial Times (ft.com)
Bloomberg (bloomberg.com)
Fortune (fortune.com)
Forbes (forbes.com)
CNN Money (money.cnn.com)
Fast Company (fastcompany.com)
TechCrunch (techcrunch.com)
GeekWire (geekwire.com)
VentureBeat (venturebeat.com)
The Economist (economist.com)
Seeking Alpha (seekingalpha.com)

In addition to these publications and websites, most major online news publications have excellent business sections. Some of these are: the New York Times, the Washington Post, USA Today, the San Francisco Chronicle, and many others.

Look At the Companies Headquartered In Your State
If you look around, you will notice there are some big companies with headquarters in your state. This is probably no surprise if you live in the northeastern states such as New York, New Jersey, Pennsylvania, or Massachusetts, or in other large states such as California or Texas. But states with smaller populations also have sizable corporations. Because these companies are in your state (or in some cases, in your city), your family may even know people who work for them and can help you decide whether they are good candidates for your investment dollar. The annual Fortune 500 edition of Fortune magazine usually lists the biggest companies in the U.S. by geographical areas. You should be able to find the list online.

Try Choosing Specific Industries
Another way to determine which companies are worth investing in is to identify industry and sector categories that interest you. An industry category defines the line of business a company is in. For example, Apple is in the electronic equipment industry. A sector identifies major categories that industries can be slotted into. In other words, industries are subsets of sectors. While Apple is in the electronic equipment industry, its sector is consumer goods. Classifying stock is useful if, through your research and reading of business publications, you determine that a particular industry or sector will be a good investment, but you don’t know exactly which companies in that industry or sector will make for the best investments. Knowing the industry or sector of the company in which you want to invest also makes it easier for you to compare how the company is doing relative to its competitors. We use the stock sectors and industries as classified by Yahoo!Finance in our analyses of stocks. Yahoo!Finance has nine sectors and more than 200 industry categories. Many other organizations, such as Standard & Poor’s, Moody’s, and Morningstar have their own industry categories, although the major sectors from one organization to another are quite similar.

Avoid Investment Ideas from Social Media
There are lots of online forums that discuss investments. In addition, stock tips and commentary circulate on social media. Some people probably get good investment ideas from these sources, but some of the participants are known to work for (or manage) companies on which they are commenting. In addition, any fool with fingers can type advice online for hundreds of thousands of people to read. We recommend that you stay away from online investment ideas offered by people you don’t know.

In 2000, 15-year-old Jonathan Lebed became the youngest person ever charged with violating Securities and Exchange Commis­sion (SEC) regulations. The SEC, the law enforcement organization for the financial markets, accused Jonathan of involvement in a "pump and dump" scheme. The organization claimed that Jonathan posted messages in chat rooms touting stocks of very tiny companies that he happened to have invested in.

As people who believed him bought the stocks, he quietly sold (i.e., dumped) the shares he owned because they were worth more after he pumped up their value on the Internet. According to the SEC, Jonathan made more than $800,000 with this scheme. He settled the case with the SEC without admitting or denying guilt, but the case illustrates how people can be fooled into buying stock by listening to online "experts."

If you need more reasons not to chat or tweet your way into investing, how about two words: insider trading. Insider trading is when you use important information that is not public (that is, the company has not released the information to the general public) to make money. In 2000, the U.S. government for the first time charged a group of people, who met in social media, with sharing insider information on the Internet.

One man passed information to another, and another, and it mushroomed from there. Everyone who got information and bought stock based on that information, whether the information was from the initial source or not, was held responsible by the government. The SEC’s job has gotten much tougher since this early pursuit of insider traders; they now include hackers who break into corporate computers to get confidential information on which they can trade. In a 2015 Forbes article titled Hackers Bring Insider Trading to the Internet Age, the publication stated the following about Federal officials chasing such hackers:

According to the two indictments released by prosecutors, the defendants allegedly orchestrated a scheme in which computer hackers based abroad obtained 150,000 corporate press releases prior to their public distribution. With early access to major news events like quarterly earnings reports or merger announcements, it was easy for the traders in the operation to earn illegal profits by trading on stocks before anyone else received the news.

Such hacking activities also increase the chances that you may inadvertently come upon information online that is considered insider information, and this may put you in jeopardy of being charged with insider trading if you act on such illegally obtained information.