Are you a web programmer familiar with LAMP stack and want to work from home? Please fill out an application here! Full time job, salaries range from around $1,000-$6,000/month.

Walk around and ask some random people about stocks, and youll hear a lot of I bought this stock at $5 and then sold it when it got to $10 and made $10,000! or I bought this stock at $5 and now its so low I dont want to look at it. These are people who sell when the stock is up, and hold on when the stock is down. At least, this seems like how most people interpret buy and hold. It seems strange though. Are they selling based on how much theyve made/lost? Or based on the price of the stock? Or based on the news that everyone knows? How exactly does that make money?

To see what a good stock is, we should start by examining where the money in the stock market comes from. Afterall, if youre going to make money, you should know where the money is coming from so that you can be secure in knowing itll keep coming! In its simplest form, a stock is a just a piece of a certain business. Theyre giving you a piece because youre giving them (theoretically) an equivalent amount of money so that the business can be expanded. This piece can then be resold to other people as you please.

Then the question becomes, how do businesses make money? Well, we can start with the articles Do You Get Money and How To Come Up With A Good Business Idea. When it comes down to it, business make money because they make a product or provide a service to someone that is worth more than the money being paid for the product/service. This is the basic concept of creating value. Two entities have something each other want; they exchange and are both better off. Say each person has $500 worth of stuff to trade. After the trade, each person now has $1000 worth of stuff to trade. Thats the power of a good trade that $1000 of value just appears out of thin air.

Compare this with a business that tries to hammer out some sort of small edge. For example, walking around all day looking for loose change can be considered a business (or maybe looking for cans, or begging people for money). In this business, not much value is created, except maybe some minor garbage cleanup. Therefore, after youve picked up some guys change, hes not going to come back to you and say, Oh, please, heres some more change that Id like to drop so that you can pick up. The problem is the fixed pie. In order for you to gain a nickel, somebody has to lose a nickel. Well, people only have so many nickels to lose

However, in a more mutually beneficial environment, when you give up a nickel, you get two nickels worth of stuff back. Now, you can turn those two nickels worth of stuff back into nickels, so you can get 4 nickels worth of stuff. Thats when your customers keep coming back for more. Its like nickels dropping out of the sky. Where do these nickels come from though? Well, whatever it is youre doing thats turning those 2 nickels worth of stuff into 2 actual nickels, thats something somebody values. Otherwise, theyd just go to the guy youre getting the 2 nickels worth of stuff from, and do it themselves. Thats the extra money from the value youve created (which youre getting the big part of). Why wouldnt your customers keep coming back? Theyre getting all that free value just like you are!

Now you know what kind of business you should invest in. Take a look at the business model of the company behind the stock. Is it creating real value for the people who buy the product? Are they happy with the money theyre paying for it? Will they come back for more? Listen to the CEO when he speaks. Is he dedicated to bringing their customers more value, or just interested in making the stock price goes up while he cashes out?

On that note, remember that stocks that have lots of news releases and updates arent necessarily good stocks, especially if theyre small. Sure, theyre keeping wall street well connected so that their stock price is of fairer value, but wall street isnt their customer! What good is it to know exactly how much money the company is making if theyre on their way to being bankrupt? Id rather have a big surprise every couple of years where they tell wall street, Oh, by the way, were actually making 3 times what you expected, and the stock price shoots up. Money made is money made whether wall street knows about it or not. Id rather they focus on their customer relationships than on wall street relationships.

Once youve found such a company, just make sure the price isnt ridiculous, and put your money in. Then, dont look at it again for at least a year. You bought the company because its creating value remember? A week from now, its still going to be doing just that, so dont worry about it. Just go do something else and let that extra value build up!

Ill further elaborate on when to sell in Why You Should Invest For the Long Term .

If you feel that this post has been of value to you, please leave a donation to show your appreciation and allow me to bring this value to other people as well!

Ask a question or discuss this post in the personal development forum .

Email This Post