If you are like most people today, you have either thought about investing in stock market or you actually went out and bought some stock. If so that’s great, there is lots of money to be made in stock market, but important question is; How do you pick your stocks?

Are you buying stock, because your brother told you to?

Did you get a hot tip from your mailman?

Or are you just buying stock because you like company’s products?

Believe it or not, a very large percent of people who invest in stock market are investing their hard earned money based on above examples without any further research.

Does this sound like a smart way to invest to you? It certainly doesn’t to me.

Now if you ask your brother what stock to buy and your brother happens to be Warren Buffett, well then I think its safe to say you will make a good investment, but how many of us can claim Warren Buffett as our brother?

For vast majority of us this kind of investing is very risky, while you could make money, it is more probable that you will lose money.

To help you keep from losing your money and to help you make best choice when picking stocks, below you will find five most important questions to ask yourself before buying a stock.

1. What Does Company Do? This sounds like pretty basic information, but it can be tough to find. Most companies offer more than one product; a big conglomerate might offer hundreds of different products in a range of industries. Digging into company’s lineup can give you a better sense of forces that will drive its results.

Scrutinizing a company’s product line cans also tell you where its profits come from. For example: video games accounted for 11% of Sony’s SNE total sales in 2000 but 40% of its earnings.

The annual report is best source for this kind of information. Be sure to read shareholders letter, as well as presentations of company’s product lines. Those are also part of company’s SEC filings.

2. How Fast is Company Growing Over long periods of time, stock prices are driven by earnings growth. That can come when a company cuts costs, but ultimately, revenues have to increase if earnings are to keep going up. If revenues, also called sales, are increasing, that’s a good indication that something is working. Maybe company boasts a better-than-average product or a more effective sales force. In contrast, flagging sales can signal trouble.

Earnings growth signifies that company is making more that enough to offset its costs. Established companies should show consistent results, but young companies often display strong revenue growth with little or no earnings. Witness myriad of Internet companies with lots of sales and no profits.

You buy or trade stocks, bonds and mutual funds. Perhaps you invest in a 401(k) plan. You can us “Options” as part of your short or long term investment objectives.

Did you know you may be using a form of options as a part of your everyday life?

Do you pay a premium every quarter for house, auto, and medical insurance?

You have purchased insurance as a safeguard against a fire in your home, a crash in your car, or large medical bills. Some investors use options on stocks or cash indexes to protect and insure value of their portfolios.

A major advantage of options is their versatility. They can be as conservative or as speculative as your investing strategy dictates. Options enable you to tailor your position to your own set of circumstances. Consider following benefits of options:

* You can protect stock holdings from a decline in market price.

* You can increase income against current stock holdings.

* You can prepare to buy stock at a lower price.

* You can position yourself for a big market move even when you don’t know which way prices will move.

* You can benefit from a stock price rise without incurring cost of buying stock outright.

What Is An Option?

An option is a contract giving buyer right, but not obligation, to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date (listed options are all for 100 shares of particular underlying asset). An option is a security just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties. Listed options have been available since 1973, when Chicago Board Options Exchange, still busiest options exchange in world, first opened.

Options vs. Stocks

In order for you to better understand benefits of trading options, you must first understand some of similarities and differences between options and stocks.

Similarities:

Listed Options are securities, just like stocks.

Options trade like stocks, with buyers making bids and seller making offers.

Options are actively traded in a listed market, just like stocks. They can be bought and sold just like any other security.

Differences: