| When looking for good stocks to buy using a longer | | | | They are companies that require large amounts of |
| term value investing approach, I am immediately | | | | expensive equipment, machinery or planes in order to |
| confronted with the multitude of companies listed on | | | | trade. Think steel mills, car makers and airline |
| my stock market. I manage the task of how to buy | | | | companies for example. Why do I generally avoid |
| good stocks by narrowing the field of companies to | | | | them? |
| those that appear to provide the greatest value with | | | | Unless the companies continue to inject large |
| the least risk. | | | | amounts of their earnings into new equipment, they |
| If I can rule out a substantial number of riskier | | | | will lose their competitive edge, and one way or |
| companies for good reasons, it helps to reduce the | | | | another those earnings will be lost to shareholders. |
| complexity of the task. Listed below are classes of | | | | Penny Stocks or Small-Cap Stocks |
| companies I generally rule out for the reasons | | | | These stocks are usually defined by their share price. |
| outlined. By eliminating these companies, I will be | | | | The price you are talking about depends on the size |
| more likely to minimize risk when choosing from the | | | | of the particular country or stock market. For |
| remaining companies. | | | | example. those stock that sell for less than $5 in the |
| Initial Public Offerings (IPOs) | | | | USA or less than $1 in Australia. |
| These are companies who offer stock to the public | | | | Why do I avoid them? Mainly because they tend to |
| for the first time by applying to list them on a stock | | | | exhibit either low liquidity (a low trading volume) and |
| market at a listing price via a prospectus - a | | | | you may not be able to sell them when you want to |
| document providing essential details about the | | | | - or high volatility (the price jumps around a lot) - or |
| company. I generally avoid this class of investment. | | | | both! |
| IPOs, or initial public offerings, are often issued by | | | | Regulated Markets and Price-Competitive Companies |
| smaller, younger companies seeking additional capital | | | | I avoid companies that operate in regulated markets |
| to expand, but can also involve larger privately | | | | where possible, as they are always at the whim of |
| owned companies looking to go public. | | | | the regulating authority (commonly government |
| IPOs can be a risky investment as it is difficult to | | | | bodies). They are in a no-win situation because if |
| predict what the stock will do on its first day of | | | | they are successful in making a decent profit, the |
| trading, and from then on. There is often little | | | | regulator usually doesn't like the idea - and you |
| historical data to go on in order to analyze the | | | | guessed it, moves to tighten the regulations! |
| company. The directors set the listing price that the | | | | Price-competitive companies have a different |
| investor has to pay. You can be sure that they will | | | | problem. They have to be the cheapest business in |
| set the price at a level that will ensure a good profit | | | | their industry and usually don't have an economic |
| for them. | | | | moat to protect them. They always have their |
| But will you make a profit? Don't bet on it unless you | | | | competitors biting at their heels. Unless they can |
| can be confident that there is a large pool of punters | | | | achieve large scale and can make it very expensive |
| hoping that they can make a profit too, and are | | | | for others to enter the market, they are continually |
| sufficiently enthusiastic that they drive the price up | | | | under threat. |
| from the listing price. | | | | In Summary |
| Single Resource Companies | | | | The benefit to me in excluding the above categories |
| These are companies that usually explore and | | | | of companies from consideration of good stocks to |
| develop mineral or oil resources. Companies that mine | | | | buy is that the overall risk in choosing to invest in |
| or explore for one resource are very dependent on | | | | some of the remaining companies will be significantly |
| the price that they can sell that resource for, if and | | | | reduced. |
| when they can market it. | | | | Risk reduction, while maintaining a high return, is the |
| So if you buy into a single resource company, you | | | | name of the game! The risk of loss is real - it can be |
| are taking a bet that the price of that resource will | | | | minimised but not eliminated. |
| rise. Unless your information sources are better than | | | | Being able to avoid the risky companies like the ones |
| most, you are in a high risk enterprise. I prefer low | | | | above is one thing. But how do you go about |
| risk enterprises! | | | | choosing the hottest investment stock from the rest |
| Capital-Intensive Industries | | | | of the pack? Check out the links below to find out! |