## How to Invest in Stocks: A Step-by-Step Guide According to William O’Neil
William O’Neil, the founder of Investor’s Business Daily, developed a set of principles for successful stock investing, known as the CAN SLIM method. This article will provide a comprehensive guide to O’Neil’s approach, outlining the steps involved in identifying and investing in potential winning stocks.
### 1. Understand the CAN SLIM Method
The CAN SLIM method focuses on identifying stocks with specific characteristics that O’Neil believes are indicative of future growth and profitability. These characteristics include:
– **C**urrent quarterly earnings per share growth of at least 25%
– **A**nnual earnings per share growth of at least 20% over the past three to five years
– **N**ew product or service introductions or breakthroughs
– **S**trong institutional sponsorship (mutual funds and hedge funds)
– **L**eading industry rank (within the top 30% of companies in their industry)
– **I**ncreasing price momentum (recent price strength)
– **M**arket capitalization of at least $100 million
### 2. Conduct Thorough Research
O’Neil emphasizes the importance of conducting thorough research before investing in any stock. This includes:
– **Analyzing financial statements:** Review the company’s income statement, balance sheet, and cash flow statement to assess its financial health and performance.
– **Reading industry reports:** Stay informed about the industry in which the company operates, its competitive landscape, and any upcoming trends or developments.
– **Following company news:** Monitor news articles, press releases, and SEC filings to keep up-to-date on the company’s latest activities and announcements.
### 3. Identify Winning Stocks
To identify potential winning stocks, O’Neil suggests using the following criteria:
– **High relative strength:** Look for stocks that are outperforming the broader market, as indicated by their relative strength line (RS line). A strong RS line suggests that the stock has momentum and is gaining interest from investors.
– **Breakouts from consolidations:** Stocks that break out from trading ranges or consolidations often signal a breakout to new highs. O’Neil recommends looking for stocks that break out with strong volume, indicating institutional buying.
– **New highs:** Stocks that are making consecutive new highs are often indicators of strong price momentum and potential upside.
### 4. Determine Entry and Exit Points
Once you have identified potential winning stocks, you need to determine when to enter and exit your positions. O’Neil suggests the following guidelines:
– **Entry points:** Enter a stock position when it breaks out from a consolidation or makes a new high with strong volume.
– **Exit points:** Exit a stock position when it falls below its 7-week moving average, or when the RS line breaks down.
### 5. Manage Your Portfolio
O’Neil advocates for a disciplined approach to portfolio management. This includes:
– **Diversification:** Spread your investments across different industries and sectors to reduce overall risk.
– **Position sizing:** Allocate a specific percentage of your portfolio to each stock, based on your risk tolerance and the stock’s potential.
– **Regular monitoring:** Monitor your portfolio regularly to track the performance of your stocks and make adjustments as needed.
### Additional Tips from William O’Neil
In addition to the core principles of the CAN SLIM method, O’Neil also provides the following additional tips for successful stock investing:
– **Focus on the long term:** Invest for the long term, with a time horizon of at least three to five years.
– **Control your emotions:** Avoid making investment decisions based on fear or greed.
– **Learn from your mistakes:** Mistakes are part of the investment process. Analyze your mistakes to identify areas for improvement.
– **Stay informed:** Keep up-to-date on the latest market news and trends.
– **Consider professional advice:** If you are a beginner or need additional guidance, consider consulting with a financial professional.
### Conclusion
William O’Neil’s CAN SLIM method provides a structured approach for identifying and investing in potential winning stocks. By following these principles, investors can increase their chances of success in the stock market. However, it is important to remember that all investments carry risk, and thorough research and due diligence are crucial before making any investment decisions.