When the economy and the market are racing for the bottom, they can drag down good companies along with the bad.
A troubled economy tends to strip away any growth weak companies enjoyed in previous growth cycles.
However, because good companies may suffer also, investors need a way to judge a company's performance.
One way investors can take the pulse of a potential investment is to compare how the company is performing relative to its peers.
Yahoo! Finance offers a way you can compare how a company is doing relative to its industry sector and its peers.
Click on the "Investing" tab and choose "Stocks." On this page, look for the link to "Sector/Industry Analysis."
This link takes you to a page that compares the various industry sectors. Other online providers may have a different way of identifying sectors.
Here's how you can use this information.
Let's say you are interested in IBM. Click on the "Technology" tab. IBM is in the Diversified Computer Systems sub-group.
If you don't know where a company is classified, look up its quote and go to the Profile page. How Yahoo! classifies a company is listed in its profile.
Click on the Diversified Computer Systems and you will find a list of the companies in that sub-group. Each company will have a number of financial ratios listed.
At the top of the list are the corresponding numbers for the whole Technology sector as well as numbers for the Diversified Computer Systems group.
You can compare IBM or any other company with the sector and sub-group as well as comparing the company with its peers � such as comparing IBM and Hewlett-Packard.
If you want, you can download this information to a spreadsheet such as Microsoft's Excel.
This is not a recommendation for IBM or Hewlett-Packard and other online providers of financial information offer similar capabilities as Yahoo!.
Always check current news about a potential investment for any late-breaking announcements and so on that may impact your decision.
Investors have a tremendous amount of information at their fingertips. There is no excuse for making investment decisions in the dark.
The earnings season is upon us and given the dire circumstances of the economy, investors are taking a hard look at what stocks are reporting.
Earnings tell investors how much the company earned or lost for its owners (shareholders) in the past quarter, which ended March 31.
How do you judge earnings in the middle of the worst economy since the Great Depression?
Investors may have different approaches to this problem.
Some may factor in the state of the economy and lower expectations accordingly.
This is a good strategy, but you must be careful. Some companies may use the bad economy to hide what would have been a poor performance even in good times.
One way to put some perspective to earnings is to compare the company to its peers.
For example, if a sector was down 25% for the quarter, it would not be unreasonable to expect leaders of the sector to do better than that, although they may still be down.
Companies that matched (approximately) the sector's performance could be judged as successful for the quarter.
Companies that seriously lag their sector's performance reveal a level weakness that is dangerous in this environment.
Long-term investors will want to consider why a company is lagging behind its sector. The reasons may prove beneficial in the long run, if detrimental in the short run.
For example, a company may be expanding to grab market share from weaker companies. The short-term impact on earnings may pay handsome dividends when the economy begins moving again.
Unfortunately, weak companies may be in that position because of unwise decisions in the past, such as taking on too much debt or betting the economic growth cycle would never end.
So, the short answer during economic turmoil is the same as it always is: Look for strong companies to not fall behind their peers.
These will be the leaders when the economy begins a serious recovery.
This is the fifth of a five-part series on why you should continue to invest in stocks.
You can trade stocks or buy and hold.
Stocks offer traders and investors opportunities for success. This is not unique among securities, but it does make equities a versatile investment.
Long-term investors (buy and hold) have found opportunities for success in picking good companies and riding with them until something changes the investor's opinion of the company or its stocks.
Buy and hold investors are often ridiculed for riding a stock up, and then riding it right back down.
This is certainly a risk, but smart buy and hold investors understand that a good deal may not be good forever.
There is a time to hold and a time to take profits and move on to another opportunity.
The financial meltdown of 2007-09 fed the fire of criticism for the buy and hold strategy. Critics pointed to the many investors that saw their net worth plummet.
No one is immune from major market pullbacks, but with proper asset allocation and attention to what is happening in the economy, buy and hold investors have just as good of chance at success as traders.
Traders move in and out of positions based on what the market is doing.
One extreme is the day trader who closes out all positions at the end of each day. Other traders stretch their holding period as long as they are making profits, whether that is hours, days or weeks.
Traders also cut their losses quickly and move on to the next deal.
Are traders more successful than investors? That depends on whether you are comparing smart traders and dumb investors or the other way around.
Traders, also known as active investors, can be very successful if they are clever and work hard. You can say the same thing for buy and hold investors.
The bottom line is success with either strategy takes focus and hard work.
Which you choose (and some do both), is a matter of personal preference. Stocks give you the option to choose.
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