As you may well know, I am an advocate of investing in individual stocks. Index funds are absolutely useful for certain investing situations its what I currently have my IRA invested in. But the growth potential of individual stocks is huge. Not only that, but theres something about investing in individual companies that really adds a lot of excitement to investing. What that excitement means is that youll be paying more attention to your investments, which in turn increases the likelihood that youll make better returns from them.

So how do you pick an individual stock? Here is the system that I use. Now for full disclosure, I am not a season investor of 30 years instead, Im just going on about two. But I follow the advice of the investment advisory company I work for, which has a combined century of knowledge on the subject. Picking stocks using this method I was up about 40% for 2007, and am down about 10% this year.

This stock picking method focuses on looking for growth stocks that you will hold, on average, for about four to six months.

1) Check your market timing. Before you even begin to spend time looking for a stock to purchase, its important to know whether or not now is the time to buy any stock. For example, in June 2008 the market timing system I follow basically said to get out of the market. So I did, and missed a 30% decline in the market.

Even though market timing indicators are based on the broad market, it can be extremely difficult to find strong growth stocks that are able to shrug off a weak market let alone a crash like the one weve experienced this year.

You dont have to be quite as concerned about the opposite, when the market is overvalued. Its true that as a buy-and-hold investor, this would be a bad time to purchase. But the time frame of a growth stock investor is short enough that you dont have to be constantly looking for tops in the market (you do, however, have to be wary of tops in the stocks you own).

Lastly, there are times when you may want to be only partially invested. For example, from October 2007 to June 2008, I gradually moved from fully invested to cash, as it became more and more difficult to find individual stocks that beat the market.

2) Narrow the field use a stock screener. Stock screeners are exactly what they sound like screens which filter out stocks you dont want and leave you with a smaller number of stocks which warrant a closer look. There are thousands and thousands and thousands of stocks out there, so a stock screener is essential for narrowing that field so that you can spent your time only looking at stocks which show potential.

I use the Motley Fool Caps stock screener. for reasons I will explain in the next step. Here are what my settings look like, and the reasoning behind them. Ive only mentioned the settings that I change.

• Custom Market Cap: $250M to $100B. Basically, this eliminates micro-cap stocks, which we dont dare touch. It includes large-cap stocks because even those can be big growth stock winners (look at Google and Apple).
• CAPS Rating between 4 and 5 stars.
• Active picks: 50. Otherwise the star rating system doesnt have enough samples to make it reliable.
• Current price minimum: 5. Anything priced below that would be too volatile for our tastes.
• 4 Week Price Change % Min: 10. This gives us stocks that are in an upward trend over the past month
• 13 Week Price Change % Min: 20. This helps to avoid stocks just on a temporary upswing.
• 3 Month Avg Daily Volume Min: 250,000. Anything below this volume also helps avoid volatile stocks.
• EPS Growth Rate and Revenue Growth Rate: 20. Helps us weed out stocks which are not actually growing in revenue.

Now, I do sometimes make adjustments to these numbers. For instance, running this screener in the current market conditions returns me only one stock. So often times Ill adjust the 4 and 13 week price change lower in order to include more stocks to look at. Often times these are more of a watch list type stock, as I dont really want to purchase a stock that is downtrending, but in bear markets its always good to have a few names so that youre ready to purchase when the market turns.

3) Crowdsource your research. This step is a favorite of mine, and one that I added personally along with the other steps I learned from the company I work for. I have a full time job that does not involve researching stocks all day. However, that research is important to finding solid stocks. So how do I get around that? By having other people do it for me!

Its risky, of course, to rely on the advice of a single person for investing recommendations, whether its your barber of Warren Buffet. But the collective knowledge of hundreds or thousands of investors can be incredibly useful.

I use Motley Fools Caps. mentioned above, for most of my crowdsourcing. Its a popular site, which means lots of opinions, and has an intuitive interface for navigating through stocks. So when I use their screener, Im not only able to screen against common fundamental and technical filters, but also against the collective opinion of the crowd at the same time. This helps to eliminate stocks which may look good on paper but have a flaw you cant necessarily glean from the initial numbers.

I have found very few high rated stocks using this method that turned out to be real duds. I do sometimes find stocks I consider to be good picks rated 3 (out of 5), but theyre usually extremely well known names which therefore attract a lot of different opinions (such as Apple).

Dont stop with just looking at the star rating. Be sure to read through the opinions and find if there is a common theme among the opinions. This also helps with determining if there is a prejudice against the stock. Take for example Crocs (CROX). This was a very poorly rated stocks all throughout 2007, even though it posted 300% gains at one point. But people rated it poorly because the shoes looked stupid.

Lastly, I also like to check investing blogs to see if they have any opinion on the stock. I usually start with Seeking Alpha and go from there.

4) Check the numbers. Our screener helped us get rid of any really unattractive numbers. Crowdsourcing helped us narrow down the field even further and hopefully gave us at least a handful of potential stocks. Now we need to look at those stocks closer to make sure they meet our criteria.

I use software we have access to at our company to get these numbers, but any major investment site (such as Yahoo! Finance) should have them as well. Here is what Im looking for:

• Increasing EPS (earnings per share) quarter after quarter
• Increasing sales
• Increasing fund investors
• Increased earnings estimate for the current and following year

Pretty simple, eh? Normally it would be dangerous to look at just these numbers, but by this point, thanks to the previous steps we took, we are (hopefully) looking at only quality stocks now, and are just confirming our findings.

You may notice that one figure I have not mentioned is the P/E, or price to earnings ratio, which is the holy grail of many investor strategies. The reason is that it just doesnt work for this growth investing strategy. In fact, a high P/E ratio is often the sign of a skyrocketing growth stock! Take First Solar (FSLR) as an example. You could have made 400% from this stock last year, but only if you werent scared away by the P/E ratio of 150.

5) Check the chart. By this point, we know were looking at a pretty good stock, and our market timing signals tell us its a good time to invest. So do we just go ahead and buy our shares? Nope! We have to make sure that this is a good time to invest in this particular stock. This requires a bit of technical analysis, but I promise its not too difficult.

Go to your favorite charting site. I prefer StockCharts.com. Put in the stock and look at it for the past six months (youll also want to check a full year back as well). The only technical indicators you have to concern yourself with are moving averages, so put in a 25 and 50 day moving average.

Now, there are entire libraries filled with books on technical analysis, but here are the basics you are looking for:

Red Flags

• The stock has had sharp gains (around 10%) over just the past few days without any news behind it. While this does show strength, it can also result in your buying at the top, which you never want to do. Wait until the stock pulls back at least a few points before considering investing.
• The stock has one or more tops (a top on a chart simply looks like a hill). Tops represent resistance. and means the stock is having trouble going higher than those tops. It can be dangerous to buy right before a top, as a stock that doesnt break that top is often in for a downtrend. Two tops is worse, and three tops is a very bad sign.

Green Flags

• The stock is trending upward but it still within a reasonable distance from its 25 (and even better, 50) day moving averages.
• The stock has recently broken then previous resistance, and even better is at new highs. Assuming that the break through wasnt too high of a spike, this is an excellent sign that the stock is on its way to higher prices.
• The stock has had sharp gains due to good news. A classic example of this is a stock that rockets higher due to surprisingly positive earnings results. Even though this places a stock higher above its moving averages, it also is a very strong sign that the stock is headed higher.

These tips should help serve as general guidelines as to when the best time is to purchase the stock youre looking at.

And thats it. You now have a basic tutorial on how to find, research, and buy individual stocks on your own.

I hope to follow this post up with a step-by-step example using a specific stock. I also would like to put together a guide on how to actually purchase a stock once youve found one you like, as its a very simple process that still manages to scare away a lot of new investors.