You can invest in a great company and still see its stock go nowhere. Why? Because what makes the stock go up is demand - there need to be more buyers than sellers of the stock.
If you pick a stock for all the right reasons and the market notices the stock as well, that attention will cause the stock price to climb. The things to watch for include the following:
Institutional buying: Are mutual funds and pension plans buying up the stock you're looking at? If so, this type of buying power will exert tremendous upward pressure on the stock's price. Some resources and publications track institutional buying and how that will affect any particular stock.
Analysts' attention: Are analysts talking about the stock on the financial shows? As much as you should be skeptical about an analyst's recommendation, it offers some positive reinforcement for your stock. Don't ever buy a stock solely on the basis of an analyst's recommendation.
Newsletter recommendations: Newsletters are usually published by independent researchers. If influential newsletters are touting your choice, that praise is also good for your stock.
Weigh In Your Risks Before Investing
How much risk is appropriate for you, and how do you handle it? Here are some points to keep in mind when weighing risk versus return in your situation:
1. Your financial goal. In five minutes with a financial calculator, you can easily see how much money you're going to need to become financially independent. Say that you need $500,000 in ten years for a worry-free retirement and that your financial assets are currently worth $400,000. In this scenario, your assets would need to grow by only 2.5 percent to hit your target.
2. The important point is that you don't have to knock yourself out trying to double your money with risky, high-flying investments; some run-of- the-mill bank investments will do just fine. All too often, investors take on more risk than is necessary.
3. Your investor profile: Are you nearing retirement, or are you fresh out of college? Your life situation matters when it comes to looking at risk versus return. If you're just beginning your working years, you can certainly tolerate greater risk than someone facing retirement. This is true because even if you lose big time, you still have a long time horizon in which to recoup your money and get back on track.