How To Invest In Stocks: 3 Key Factors For Stock Investing (2024)

When it comes to understanding how to invest in stocks, it can be hard to know where to start. But to stay both protected and profitable in the stock market, focus on three core concepts at the heart of CAN SLIM investing. Following this approach will help you zero in on the best stocks to buy and watch at any given time.

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While the names, technologies and market trends will change from year to year, you'll find that stocks like Apple (AAPL), Alphabet (GOOGL), Amazon.com (AMZN), Nvidia (NVDA), Microsoft (MSFT) and countless others show strength in each of these three essential factors as they make big price gains.

The CAN SLIM system identifies the seven telltale traits of winning stocks. It covers all aspects of investing in stocks, from market direction and fundamental analysis of a company's business, to supply and demand and technical analysis of a stock's price performance.

While many factors come into play when determining how to buy stocks and when to sell stocks, when you're learning how to invest in stocks, don't overcomplicate it. Staying focused on these three pillars of investing success will keep you grounded as you build on your skills.

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1. Manage Risk By Managing Market Exposure

The M in CAN SLIM, which stands for Market Direction, is arguably the most important of the seven traits of winning stocks. As noted in the section on market timing, over 100 years of market history shows three out of four stocks follow the trend of the stock market indexes — either up or down.

That fact underscores this fundamental tenet of stock investing:

Buy stocks in strong uptrends. Take defensive action when the market weakens.

You can identify shifting market trends by checking The Big Picture and Market Pulse. Each day, the Market Pulse provides one of five suggested levels of market exposure, ranging from 0% - 20% to 80% - 100%. This is based on multiple factors, including how the market indexes, industry groups and leading stocks are performing.

This tiered approach also takes into account other factors, such as how many stocks are setting up, breaking out or breaking down. And what is the action and volume around key moving averages? To stay in sync with rising or decreasing risk and opportunity levels, this three-stage system helps investors get gradually in or out of stocks if they start to show signs being overbought or oversold.

So before focusing on the best stocks to buy, remember that successful stock investing starts with understanding and staying in sync with the market trend. Keep the odds in your favor by managing your risk/reward ratio based on current market conditions.

2. Focus On Big Earnings Growth Driven By New Product Or Industry Trend

Here's the second key to successful stock investing:

Focus on stocks with big earnings and sales growth driven by new products and services.

Virtually all big winners — including stocks like Apple, Microsoft, Nvidia, Amazon, and Alphabet — make their sustained price runs as they post exceptional earnings per share and revenue gains. And these gains typically come from companies as they flash something "new" — a new product, new management, or a new industry trend. This can also apply to stocks that have recently launched a new initial public offering, or IPO.

These telltale traits are represented in the CAN SLIM system with the letters C and A (current and annual earnings), as well as the N (new product, service or industry trend).

So when looking for the best stocks to buy and watch, focus on companies sharing these characteristics. You'll find such potential stock picks using IBD stock lists, stock ratings and the stock screener.

3. Buy Stocks Top Funds Are Buying — Avoid Those They're Selling

A third essential ingredient for stock investing is this basic concept:

Buy stocks being heavily bought by large, institutional investors.
Avoid those they're selling aggressively.

It's mutual funds, pension funds, banks, and other large money managers that account for the bulk of all trading in the market — not individual investors. Since these professional portfolio managers have the power to significantly move a stock up or down, it's crucial that you pay attention to what they are buying and selling.

You can track the action of institutional investors in a number of ways. IBD regularly reports on what the best mutual funds are doing, including a monthly report on new buys by top money managers. You can also see if large investors are heavily buying or selling individual stocks by monitoring the IBD Accumulation/Distribution Rating and the up/down volume ratio.

Another vital strategyis to use stock charts. Tracking the price and volume action and behavior at key moving averages is simply the most timely and objective way to gauge the health of your stocks, without relying on rumors or hearsay. So if you're serious about learning how to make money in stocks, you need use charts to see what large investors are buying or selling right now.

Don't Overcomplicate Stock Investing

Learning how to invest in stocks doesn't need to be overwhelming or overly complicated. When you boil it down, successful stock investing — with proper risk management — comes down to the three core factors featured here.

While it takes time, study and discipline to master this moneymaking skill, investing for beginners starts with — and continually returns to — understanding and applying these three elements. By by following these core guidelines, anyone can learn how to invest both safely and successfully over time.

Learn More About How To Invest In Stocks

Use the links below to learn more about stock investing and how to invest in stocks using IBD and the CAN SLIM Investing System — and discover how to stay both profitable and protected.