How to Make Money in Stocks by William J. O'Neil

Last updated: Sep 2, 2023

Summary of How to Make Money in Stocks by William J. O'Neil

How to Make Money in Stocks by William J. O'Neil is a comprehensive guide to successful stock market investing. The book provides a detailed strategy and methodology for identifying and investing in winning stocks.

O'Neil begins by emphasizing the importance of thorough research and analysis before making any investment decisions. He introduces the concept of the CAN SLIM system, which stands for Current earnings, Annual earnings growth, New products or services, Supply and demand, Leader or laggard, Institutional sponsorship, and Market direction. This system serves as a framework for evaluating stocks and identifying potential winners.

The author emphasizes the significance of studying the market's history and understanding the patterns and trends that have led to successful investments in the past. He provides insights into the importance of market timing and how to identify the optimal entry and exit points for stocks.

O'Neil also stresses the importance of managing risk and setting stop-loss orders to protect investments from significant losses. He provides guidelines for determining the appropriate level of risk and how to adjust it based on market conditions.

The book also delves into the psychology of investing and the importance of maintaining a disciplined approach. O'Neil emphasizes the need to control emotions and avoid making impulsive decisions based on short-term market fluctuations.

Furthermore, the author provides practical advice on how to analyze financial statements and identify key indicators of a company's financial health. He explains how to evaluate a company's earnings, sales, and profit margins to determine its growth potential.

O'Neil also discusses the importance of diversification and building a well-balanced portfolio. He provides guidance on how to allocate investments across different sectors and industries to minimize risk and maximize returns.

The book concludes with a comprehensive review of various investment strategies and techniques, including short-selling, options trading, and IPO investing. O'Neil provides insights into the pros and cons of each strategy and offers guidance on how to incorporate them into an overall investment plan.

In summary, How to Make Money in Stocks by William J. O'Neil is a comprehensive guide to successful stock market investing. It provides a detailed strategy for identifying winning stocks, managing risk, and building a well-balanced portfolio. The book emphasizes the importance of thorough research, market timing, and disciplined decision-making. It is a valuable resource for both novice and experienced investors looking to improve their investment performance.

1. The Importance of Fundamental and Technical Analysis

In "How to Make Money in Stocks," William J. O'Neil emphasizes the significance of both fundamental and technical analysis in successful stock investing. Fundamental analysis involves evaluating a company's financial health, including its earnings, sales, and growth potential. On the other hand, technical analysis focuses on studying stock price patterns and trends to predict future price movements.

O'Neil suggests that combining these two approaches can provide a more comprehensive understanding of a stock's potential. By analyzing a company's fundamentals, investors can identify strong growth prospects. Technical analysis then helps determine the optimal time to buy or sell a stock based on price patterns and market trends. This integrated approach allows investors to make more informed decisions and increase their chances of making profitable trades.

2. The Importance of Cutting Losses

O'Neil emphasizes the importance of cutting losses quickly when investing in stocks. He suggests that investors should set a predetermined stop-loss level, which is the price at which they will sell a stock if it falls below a certain threshold. By setting a stop-loss level, investors can limit their losses and protect their capital.

O'Neil advises that investors should never let a small loss turn into a large one. By cutting losses early, investors can preserve their capital and avoid significant financial setbacks. This strategy also allows investors to focus on stocks with better potential for growth, rather than holding onto underperforming stocks.

3. The Power of Relative Strength

O'Neil introduces the concept of relative strength, which measures a stock's performance compared to the overall market. He suggests that investors should focus on stocks with strong relative strength, as they are more likely to outperform the market.

By identifying stocks with high relative strength, investors can increase their chances of making profitable trades. O'Neil recommends using relative strength as a key factor in stock selection, as it provides valuable insights into a stock's potential for growth.

4. The Importance of Volume

O'Neil emphasizes the significance of volume in stock trading. He suggests that investors should pay attention to the volume of shares traded, as it can indicate the strength of a stock's price movement.

High volume during a price increase suggests strong buying interest, indicating a potential uptrend. Conversely, high volume during a price decline suggests strong selling pressure, indicating a potential downtrend. By analyzing volume patterns, investors can gain insights into market sentiment and make more informed trading decisions.

5. The Role of Market Timing

O'Neil highlights the importance of market timing in successful stock investing. He suggests that investors should pay attention to the overall market trend and align their trades with the prevailing market direction.

O'Neil recommends investing in stocks during a confirmed uptrend and avoiding or selling stocks during a confirmed downtrend. By following the market trend, investors can increase their chances of making profitable trades and reduce the risk of investing in a declining market.

6. The Significance of Earnings and Sales Growth

O'Neil emphasizes the importance of evaluating a company's earnings and sales growth when selecting stocks. He suggests that stocks with strong earnings and sales growth have a higher potential for price appreciation.

O'Neil recommends focusing on stocks with at least 20-25% annual earnings and sales growth. By investing in companies with strong growth prospects, investors can increase their chances of making profitable trades and achieving long-term capital appreciation.

7. The Impact of Institutional Sponsorship

O'Neil suggests that investors should pay attention to institutional sponsorship when selecting stocks. Institutional investors, such as mutual funds and pension funds, can significantly impact a stock's price movement.

O'Neil recommends investing in stocks with high institutional sponsorship, as it indicates confidence from professional investors. By following institutional buying and selling patterns, investors can gain insights into market trends and make more informed trading decisions.

8. The Importance of Emotional Discipline

O'Neil emphasizes the significance of emotional discipline in successful stock investing. He suggests that investors should avoid making impulsive decisions based on fear or greed.

O'Neil recommends following a systematic approach to investing, based on objective criteria such as fundamental and technical analysis. By maintaining emotional discipline, investors can make rational decisions and avoid common pitfalls in the stock market.