RESEARCHING STOCKS ONLINE

Where do the hottest stock tips come from? The people
with the coolest heads — and the most background information
— generate them. And truly hot tips don’t come from
people with ulterior profit motives or newsletter subscriptions
to sell. In fact, you may be your own best tipster. This
chapter gives you pointers on how to separate the hot tips
from the lukewarm losers when it comes to picking stocks.

Diversifying Your Portfolio
Diversification is free insurance. It doesn’t protect you against
every conceivable risk, but experts unanimously agree that
your online stock screening criteria should promote a diversified
portfolio. A diversified portfolio insures you against
market swings affecting one company, industry, or economic
sector.
Diversifying according to sector
With a diversified portfolio, the value of your entire stock
portfolio doesn’t plummet if a single industry in which you
own stock is on the skids. To diversify, purchase stocks that
represent different components of the economy, called
sectors. A sector is a category of related industries.

You don’t need to buy stocks in every economic sector — just
a healthy array of unrelated industries. According to the NAIC,
you can have a well-diversified portfolio by purchasing stocks
in just a half a dozen sectors. Economists all use different criteria
for categorizing businesses into sectors. Table 3-1 provides
a list of 12 sectors listed on the Market Guide Web site (go to
www.marketguide.com and click the What’s Hot link) and
examples of the industries they represent.

Diversifying according to size
Small companies’ stock prices tend to be more volatile than
those of large companies. Even within the same industry,
stocks of companies of different sizes tend to increase and
decrease at different times. When large-company stocks are
up, small-company stocks may be down, and vice versa.
A company’s size is determined by its market capitalization,
or market cap. Market cap is determined by multiplying the
current price per share by the number of shares of the company’s
outstanding stock.
The three levels of market cap are as follows:
n Small cap: Less than $500 million
n Mid cap: $500 million to $5 billion
n Large cap: Greater than $5 billion
At least half your online portfolio should be made up of midcap
stocks, and the remaining half should be split equally
between small- and large-cap stocks.