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Your Stock Buying Checklist � A Review

step-by-step guide to finding stocks with the characteristics that make them market winners. This lesson reviews stock buying concepts presented in this course.  

Investor's Business Daily's Key Buy Rules

#4. Are Professional Investors Buying The Stock?

Mutual funds and other professional investors represent a large percentage of the market's trading activity. Their buying and selling power can dramatically influence a stock's price.

Buy a stock the funds are buying and you should be in good company. But if you get into a stock the funds are selling, watch out. Funds have experienced teams of analysts that identify the better companies. But be sure you're following the smart money -- funds that have top performance records.

Where The Big Money's Flowing
(For Sample Purposes Only)

The most unusual trading activity is found in Stocks On The Move, in both the New York Stock Exchange and Nasdaq stock tables.

In the middle of the example above, St. Jude Medical shows a price jump of $1.02 on a volume increase of 72%. The stock is boldfaced, underscoring its 87 EPS Rating and 86 Relative Price Strength Rating. Its Industry Group Relative Strength, SMR and Accumulation/Distribution Ratings are all A or B.

You can spot the earliest indication of unusual trading activity in the Volume Percent Change (Vol % Chg) column of IBD's stock tables, which shows how much trading volume changed yesterday vs. the stock's average over the past 50 trading days.

Vol % change
(For Sample Purposes Only)

In our Dr. Reddy's example, volume was up 133% over average trading volume and the price was up $2.11, suggesting heightened activity by major investors.

The home page of features "Where The Big Money's Flowing Now" and tracks big-volume changes throughout the day by noting the 14 NYSE or Nasdaq stocks with the largest increases in trading volume.

You can measure professional buying with IBD's proprietary Accumulation/Distribution Rating. Based on an A to E scale, "A" represents heavy buying and, at the opposite end, "E" represents heavy selling. This rating is enhanced by "+" and "-" symbols.

  • Look for stocks rated "A." Stocks rated "B," experiencing moderate buying, are also worth considering. "C"-rated stocks are neutral and may be O.K.
SmartSelect A/D
(For Sample Purposes Only)

Dr. Reddy's Accumulation/Distribution Rating is "C+", meaning buying and selling trends in this stock have been basically neutral.

The lesson titled "Sponsorship: Catching The Stocks The Pros Are Buying," explains the influence of professional investors on individual stocks.

#5. Market Direction

It is imperative to know the general market's direction and to follow its trend. When the market turns down, three out of four stocks will also fall -- even quality stocks.

  • Watch the daily price and volume movements of the major market averages (Dow, Nasdaq and S&P 500), looking for "distribution" that may herald a downtrend and - on the flip side - "follow-throughs" that may indicate a new uptrend.
  • Read IBD's "The Big Picture" column to understand the market's health.
  • Find out if the market is favoring big-capitalization or small-capitalization stocks. Check IBD's charts on "Big-cap Growth Funds Vs. Small-Cap Growth Funds" and "Value Funds Vs. Growth Funds." Focus your research on whichever is moving higher.
  • Also check the S&P 500 and Dow indexes (which represent big-caps) and the S&P 600 (which represents small-caps).

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