How to Make Money in Stocks (C20): 24 Rules for Picking Winning Stocks

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There has been a lot of information shared from this book.

Let’s recap some of the most important guidelines for choosing a winning stock.

• Stay away from cheap stocks. Most super-stocks emerge from a base of at least $30. Stay away from anything below $10.

• Check that each of the last three years’ annual earnings per share have been up 25% or more. Also check to make sure that the general consensus for the next year is also at least a 25% growth.

• The last few quarters’ earnings per share should be up a minimum of 25%. Expect it to be higher in a bull market: 40% and up.

• Check that each of the last three quarters’ sales are increasing by at least 25%.

• Only buy stocks that have a return on equity of at least 17%.

• Ensure that the recent quarterly after-tax profit margins of the stock are improving and are close to the stock's highest after-tax margins.

• Look for stocks in the top 10% of IBD’s 197 Industry Groups rankings list.

• Ignore dividends and P/E ratios.

• Buy stocks with an IBD Relative Price Strength of at least 85.

• Look for an average daily volume of at least 200,000.

• Learn to read the charts so you can buy at the exact right time. The right time is when a stock initially breaks out of a proper base with at least a 50% daily volume increase above the normal.

• Average up, not down, and cut all losses at 8%.

• Write down your sell rules and stick to them.

• Ensure at least one better performing mutual fund has also bought your stock recently, and that institutional sponsorship has been increasing over the last several quarters.

• The company you are investing in should have an excellent, new product that is selling well, and a big market for the product.

• The general market should be in an uptrend.

• Stay away from options, foreign stocks, bonds, preferred stocks, and commodities.

• The company's top management should own a significant amount of stock.

• Invest in companies that have a new stock issue within the last 10 years.

• Leave your ego at the door. The market is always right.

• Stay informed about any company you own, and also about the general market. Learn to recognize market tops and bottoms.

• Look out for companies that announce buybacks of their common stock. Check if there is new management.

• Don’t buy a falling stock.

• Have courage, be positive, and don’t give up.

Read the first chapter of Swing Trading for Dummies here.

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