This is Part 2 of a Series on becoming an educated investor. Making money in the stock market is not difficult, provided you know what you are doing and are able to speak the language. This post gives you some of the rules that you will need to increase your earnings potential..
Your mission isnt to pick the next Google or Amazon (but it would be nice). Your mission is to make money when youre right, get out of the stock early when youre wrong, and use your head instead of your heart when making investment decisions.
Stock Picking Basics
There are a few rules in addition to the ones you learned in part one that will help you succeed in picking stocks. These were taken from reputable sources, like Warren Buffett, William Oneil, and Benjamin Graham. Use these criteria to judge for yourself whether a stock is a good investment. People always come at me with stupidity like “You should invest in Ford, it’s a good company”, and when I come back with “Really? Whats their Earnings Per Share this year?”, and they cant tell me, I promptly throw their idea in the garbage.
Rules
• Stay away from the cheap stuff. Do not buy a stock whose share price is below $28
• Earnings Per Share (EPS) lets you know how profitable a company is. Look for growth of 30% or more over the past 3 years, or 50% per quarter if the company has been around for less than 3 years
• Return on Equity (ROE) lets you know how well the company is performing financially. Big winners have 20% or more
• The company needs to have done something new to make itself profitable. That could mean a new management team, a new product, a new market (like Wal Mart entering China). William Oneil, creator of Investors Business Daily and author of 24 Essential Lessons for Investment Success 
• Lastly, make sure the stocks that you are considering are in winning industries. Yahoo! Finance has a feature called Leaders and Laggards that can take the guess work out of making your selection. As of this post, Multimedia & Graphics Software was a leader with 90.53% growth in their quarterly revenues.
These are some rules to get you started, but are no means a substitution for the learning that you will have to do to make some real moves in the market. All the above information can be found in the company’s prospectus (a statement that’s distributed to investors that describes the company), or on sites like Google or Yahoo! Finance.
Sectors
As you start paying attention to the market, you may hear the terms sector and industry thrown around. Sectors refer to a large segment of the economy, while the term industry describes a much more specific group of companies or businesses. There are 9 sectors as far as investing and wall street are concerned:
• Basic Materials – The basic materials sector includes the mining and refining of metals, chemical producers and forestry products
• Conglomerates – A conglomerate is a combination of two or more companies engaged in entirely different businesses together into one overarching company. Examples include GE, Warren Buffett’s Berkshire Hathaway, and Dell
• Consumer Goods – Consumer goods are those that are bought for home and personal use, like appliances, cleaning products, paper, recreational vehicles, and food. Major players are companies like Kraft, Kodak, and Anheuser-Busch
• Financial – These are your banks, lenders, and investment houses. Wells Financial Corp, Equifax Inc, Fannie Mae, and Visa are examples of Financial Sector companies
• Healthcare – Healthcare sector companies include drug makers, drug deliverers, biotechnology companies, and hospitals (including old folks homes…a good industry to invest in for the long term). Dynacq, GlaxoSmithKline, and MannKind Corp (a biopharmaceutical company, focuses on the discovery, development, and commercialization of therapeutic products) have probably made some of the drugs that have kept you alive, and you never knew it.
• Industrial Goods – These are raw materials, equipment, or product components required by a business for the production or distribution of other goods or services. Industrial goods range from mineral, agricultural, and forestry products to complex electronic equipment. Aerospace, farming equipment, heavy machinery, and waste management are all parts of the Industrial Goods sector.
• Services – Services is and will continue to be a hot sector. These range from auto dealerships to railroads, to jewelry stores, to wholesalers. Become familiar with this sector, as it is probably where you will make the most of your money!
• Technology – A category of stocks relating to the research, development and/or distribution of technologically based goods and services. This sector contains businesses revolving around the manufacturing of electronics, creation of software, computers or products and services relating to information technology. Companies such as Virgin Mobile, Internet America, Dolby Labs, and Advanced Voice Recognition Systems are some names you might have heard of.
• Utilities – These are your Water, Gas ,and Electric companies such as American Electric Power Co, Energen Corp., and The American Water Works Company
Conclusion
It is important that you are familiar with how the market is broken down, as well as the terminology (remember what I said in Part 1 about speaking the language?). This understanding will solidify your foundation of knowledge making you a better (and wealthier) investor.
As promised, Part 3 of this series will focus on Mutual Funds, and Part 4 will consist of Treasuries, Bonds, and Foreign Investments. If you have any questions, hit me with a comment, or at ceo@arthurpledger.com.
Further Reading
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[...] A Cooperative is the professional title for a group of people working together for mutual benefit. A cooperative business belongs to the people who use it – people who have organized to provide themselves with the goods and services they need, while making money at the same time. Member-owners meet regularly, present and hear reports on their business and investment activities, and hire General Managers to handle day-to-day affairs in their companies. Members invest in the businesses to provide capital for a strong and efficient operation, and once the businesses start making money, the profits are returned to co-op members. There are over 100 million people involved in 47,000 U.S. cooperatives that are in every sector of our economy. [...]