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The Correct Price for a Stock

Only the market can correctly price a stock. With the passage of time, the market prices a stock more and more accurately.

How can you tell if a stock is correctly priced? If it has been trading sideways for a long time, it is correctly priced. The narrower the trading range, the more correct the pricing.

Wild fluctuations in price are an indication that the market has no idea how to price the stock. One day, its a great stock. The next day, its a terrible stock.

If you are buying into an industry for the first time, you must be very careful. Only buy stock in an industry that is new to you if the stock is correctly priced. This way, you don't end up getting burned by your ignorance.

If you are having a new experience, it is best not to pay too much for that new experience. Correct pricing will protect you from paying too much for a stock that is new and unfamiliar to you.

The longer the stock has flown flat across the chart and the flatter the flight, the safer the purchase. You can be sure that that stock is more or less correctly priced. This is especially true if the stock has flown flat across its chart for years.

If you buy a stock that is correctly priced, but the underlying company is growing its revenues and earnings per share, and the book value per share is increasing, you are there.

Beginner's luck is simple. Stick only to stocks that are correctly priced and you will be a lucky beginner in the world of investing.

©Edward Abbott 2004