What are some good stocks on the NASDAQ or NYSE to invest in?
I am doing a stock market simulation in my english class and I really want to do well. What are some good stocks on the NASDAQ or NYSE to invest in? I can only buy stocks on the NASDAQ or NYSE. It doesn't matter how much the stock costs as long as it will go up.
- John WLv 78 years agoFavorite Answer
Well, you have to realize that it could go up or it could go down. In general there may be a true value for that company and as long as the company is making a profit, that value should be be rising if he profits are reinvested to grow the business or the profit would be distributed through dividends, often both, but no one really know what that value is and the stock price are the speculation by investors of what that value may be. If you assume that investors are rational and competent ( a big if ) then the stock price could go up or it could go down but the overall expectation of the investment should be positive if it's a good business model and the company hasn't taken on too many risks.
So how do you make money if the stock can go up or down? Well, if you model an investment by a random walk, what is often called in physics, brownian motion, then it could go up or down equally. With a random walk you would balance it with uncorrelated investments usually bonds. Claude Shannon at MIT showed that the optimal growth of an investment balanced between a random walk and cash is 50/50. For example, a $1,000 portfolio between a stock ( random walk ) and cash would start at $500 / $500, if the stock should drop in half, you would have $250 / $500 so you would rebalance by buying $125 in stock to give you $375 / $375. If the stock should return to it's original price you would have $750 / $375 for a portfolio value of $1,125 even though the stock has essentially been unchanged. If the stock had doubled and then halved, you would also have $1,125. So balancing your portfolio essentially buys low and sells high.
Then there's the issue of how much to invest and how much to diversify. John Kelly took Claude Shannon's Information theory and applied it to gambling in what's known as the Kelly Criterion. Imagine if you had a coin toss where if you won, you won twice your wager plus the return of your wager but lost your wager when you loosed. It's a positive expectation game, you would expect to gain $1.50 for every $1 you lost. If you risk nothing by betting nothing, you win nothing, the more you bet, the more you win but if you bet everything that you have, you will lose everything with the first loss. So how does a positive sure win opportunity become a total loss? It turns out if you bet more than 50% of your portfolio, you will lose everything. If you bet 25%, you will gain the most over multiple bets. Now if you could bet on on two such coin tosses at the same time, the optimal is 21% per coin toss for a total of 42% of your portfolio. So the more you diversify between uncorrelated investments, the more you can safely invest. Of course investments are never really uncorrelated or as easy to calculate as a coin toss.
Warren Buffet says you only have to diversify 6 times if you know what you're doing, most value investment books say to diversify 30 times. If you look at the portfolios of mutual funds, the top holdings are all about 2% of the portfolio. This is because on the Kelly Criterion, you're safer if you come in low of the Criterion then when you come in high and in stocks, you have very little idea where that criterion is.
So pick good companies with good businesses, diversify and rebalance. Keep a little bit in bonds just in case they all tank.
Trying to pick just one that will "go up" is basically betting on a horse in a horse race.
- Anonymous8 years ago
Source: I trade stocks and write about stocks at http://fadi.el-eter.com