Choosing Suitable Stocks to Buy and Hold

Buying and holding stocks for a long period of time can be very profitable. Time is considered the most important thing in investing and in making money grow, but if done in the wrong way, or if the wrong stocks are picked, it can backfire and work against you. There is nothing worse than investing in a stock that doesn’t go up in time, and worse eventually goes down instead of going up. When this happens the time you waited for it to appreciate is wasted and worse, you lose a huge part of your equity.

Many large capitalists would prefer to buy stocks of companies and hold it for a long time in order to realize profits. Some retail traders also do these. These traders either doesn’t have the knowledge and experience to do short trades, doesn’t have the time to monitor the market, or simply doesn’t have the guts to buy and sell shares frequently.

Buying stocks and holding it for a long time can minimize the risk. The daily fluctuations and the market volatility doesn’t matter much for buy and hold traders or in other words, investors. The concept of buying and holding shares for a long period of time is to spot the stocks that are undervalued or are trading under their book value. It is believed that sooner or later, stocks will always find their way to their real values. It goes up if it is undervalued or it goes down if it is overvalued. One very popular advocate of buying and holding stocks is the legendary investor Warren Buffet. Buffet earned a thousandfold from buying Berkshire Hathaway shares decades ago.

So what are the things that you must consider in buying and holding stocks? Here’s a few tips.

1.) Check the fundamentals. Technical analysis or chart reading prevails for short traders but fundamental analysis prevails for investors or buy and hold traders. Fundamental analysis or reading the fundamentals of a certain company is the key to find which companies are trading under their values or which companies has a very good chance of growing. By default, investors pick large cap companies or in other words, blue chip companies. Though riskier, picking second liner stocks can give more income potential. Second liner stocks are corporations or companies that doesn’t have a capital as blue chip companies but are growing fast. Second liner stocks normally have the greatest growth potential compared to large caps and penny stocks. However, it doesn’t matter if its a blue chip/large cap, a second liner, or a penny stock. If a company shows good fundamentals such as good earnings reports, good plans for the future, mergers, lesser debt and liabilities, and even the reputation of the people involved, its price will most likely go up in time.

2.) Read the charts. Though technical analysis or chart reading is used more extensively by short traders, analyzing charts is also essential in picking stocks to hold long. If fundamentals are used to pick which stocks have good growth potential, technical analysis or its charts will show the good entry or exit points. Price moves in patterns and everything are being discounted in the price. If you intend to get the best deal or the cheaper price, monitor the charts and be patient enough.

3.) Check the overall economy. The state of the economy has a direct effect on stocks. If the economy is bad, it might be as well wise to wait a little longer and wait for a better opportunity. Stock prices normally go lower in a bad economy which will give you a better entry at a cheaper or lower price. If the economy is doing well, you can enter and wait until it will start to turn sour. The market are made up of two trends, the uptrend and the downtrend. Uptrend is the general movement of stock prices upward. A strong uptrend is called a bull run. It is a period when market conditions are so good that almost every stock rises. The opposite of the bull run is a bear market often occurs before or during a recession or depression. Both are characterized by the decrease of stock prices triggered by bad conditions in the economy. Recessions normally last for six months up to a year, or even more while depression lasts from at least a year until two years or even more. Recessions and depressions are actually healthy because they give more room for economic growth. However, these two aren’t pleasant.

4.) Check the trends of several sectors. If the economy is doing bad, it doesn’t mean that everything is bad. For example, just recently, despite the turmoil in Libya and Egypt, the tsunami in Japan, and the debt crisis that Greece and Europe has experienced in 2011, gold and other metals rose and got stronger resulting to a very stellar performance by the mining sector. The increase in oil prices globally also triggered the strength for the oil sector. If you spot which sectors are doing well, you can easily spot the stocks that are and will be doing well. Remember that in a bad economy, the good sectors are normally being crowded by traders and investors thus profit can be so quick and huge.

However, despite all of these tips, it is always very important to practice discipline and patience. It is very easy to get sidetracked and get emotional once either the market gains some serious strength or nosedives so fast. Make a plan before entering any trade and follow your plan no matter what. Set entry points, cut loss points, profit taking points, etc. Never believe in hype, but instead do your own research and always confirm what you have read or heard. Don’t trade blindly. Remember that time could become your ally or enemy. If you waste time on a certain stock that doesn’t have any good returns, you may never win it back.