Constructing a Successful Stock Purchase Plan

The purchase of a stock includes the clear identification of the reasons why you want to buy exactly this stock. Often referred to as buy case it represents a clear determination of the reasons why a stock should be included in your investment portfolio.

Before you make the investment you should make a comprehensive research on both the company that issues the stock and the stock itself.

Five main steps should be followed in order to eliminate emotions out of the purchase or sale process. As part of your plan for purchasing a stock you should follow these steps:

Step 1: Company Activity

You should identify the main activity of the company. If you are not able to determine this it makes no sense to invest in the particular company.

Step 2: Market Niche the Company Occupies

You should research the part of the economy the target company serves. You should also determine the market share of the company and its growth potentials. You should concentrate on companies that show potential for long-term growth.

Avoid investing in companies that base their activities on outdated technology or fads, since they don't provide good growth potentials. Despite its volatility, the technology sector provides higher growth potential than consumer staples.

Step 3: Demographic or Economic Trends

As part of your homework before investing you should include the determination of whether the company serves demographic or economic trends. The potential growth of a company is greatly restricted if it defines its market in too narrow limits.

Step 4: Market Ratios Indications

You should study the standard ratios as part of a fundamental analysis in order to be able to compare the company to the other companies from the same industry or sector. You should also compare the target company to the rest of the market. If you consider the company to be undervalued you should be able to justify your opinion.

Step 5: Growth Potential

You should be able to justify your judgment that the company will continue to grow. Point out the reasons for the potential growth of the company. Examine the price of the stock and check the reasons for its low value. Some of them may be a bad news concerning the company. Another reason can be that the overall sector in which the stock operates is of no interest to investors. No matter what the reason for the lower stock price, you should be able to identify it in order to determine your growth margin.

Once you have gone through these steps of your stock purchase plan you are ready to embark on investing.

Once you have constructed your buy case, you should make regular revisions. This is especially required in case the stock experiences a drastic change, which may result in the altering of the assumptions and conclusions you have made.

Buy constructing a stock purchase plan you greatly increase your chances of making a more reasonable and reliable investment decision. Avoid making investments based on guesses as much as possible because all you do is gambling not investing.

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For knowledge we can highly recommend you subscribe to the The Wall Street Journal.

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