As an investor and researcher, one of the questions I often get is when to buy a specific stock. The short answer is that you should buy a stock at a lower price and sell at a higher price. This is because people have different investing styles, strategies, and risks. What may work well for a day trader, may not work well for a value investor or position trader. The time frame also has a huge factor.
I am a position and value trader and investor. I love to buy stocks that I am watching when they take a dip. It can be a risky trade, but I don’t mind and willing to hold them until they come back or meet my profit levels. This could be a day or weeks. Recently I bought Apple stock, APPL, and it has dropped. Am I selling my position, no, because I firmly believe it will come back soon when the new models are released this year?
Buying a stock that shows growth potential and that grows is very rewarding for an investor. Hours upon hours spent searching for the perfect stock is a standard activity for investors. There are not any short cuts. The foundational rule of stocks is to buy low, sell high. Sounds simple? LOL
In this article, I’ll be giving you 6 tips that will help make your buying and selling more lucrative for you as an investor.
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Buy When The Stock Is On Sale
In-depth studies of consumer behavior have allowed us to understand why individuals are more prone to purchasing items on sale. Take the example of Black Friday. Everything is on sale, and consumers are rushing to their local stores to buy flat-screen TVs, sound systems, and all sorts of other goods. However, we haven’t observed the same trend among investors. When a stock goes on sale, or in other words, experiences a significant drop in prices, investors are quite skeptical about whether to purchase or not. The main trouble is determining whether the stock will gain momentum and increase in terms of price later on.
To avoid this hurdle, investors should have a specific price range in mind. This means that a stock should only be purchased, provided it stays within the preset price range. This will help you decide whether you should purchase a particular stock or not.
Buy When There is Undervaluation of Stock – Fundamental Analysis
Many stocks on the market are worth much more than what they are listed. This is known as the undervaluation of a stock. In other words, suppose a stock is listed for $5, but in reality, it is worth $20. In this case, that specific stock would be undervalued. As an investor, how can you determine if a stock is undervalued? Well, the first thing you should do is look at the future potential of the company. DCF, or discounted cash flows, is a measure that allows an investor to predict the movement in the price of a stock over time.
Apart from this, there are several other methods for evaluating a stock, such as a price to earnings (PE). The PE ratio can be compared to competitors to deter important information for you as an investor. If the listed price of a stock is below its value, then it is undervalued, and you should buy it.
Buy When Charts Show Upward Trend – Technical Analysis
I believe that investors should both fundamental analysis and technical analysis. Key moving averages like 20MA, 50MA, and 200MA will give investors a general trend of the stock. Investors should be very careful of stocks that climbed very fast and may correct downward. Personally I keep my charts very simple with a just couple of basic indicators. The basic indicators I use are moving averages, RSI, and linear regression. This helps give me an idea of the stock trend.
Do your homework
Before purchasing any stock, make sure you’ve done an ample amount of research to support your decision. Read annual reports, look at financial statements, and subscribe to financial newsletters to stay updated. Always remember; an informed investor is a smart investor. A critical thing to check is time for earnings statements and look at what is happening in the news. Some of the best trades are made on “bad” news days when a stock drops 4% and then pops up a day or so later.
Investing is a Marathon, Not A Sprint – Have Patience
Most successful investors are not over-caffeinated day traders watching 20 screens and making hundreds of trades. Some of the greatest investors I met were humble people that consitly bought investments and watched them mature. Considering you’ve paid heed to the previous steps and finally purchased a stock, do not hesitate or sell if it does not grow immediately. Instead, wait a couple of months, be willing to wait half a decade if you’re confident in your stocks’ ability. Analysts that predict the movement of stock prices in most cases do not mean that the stock will grow immediately. Even if a period for growth is specified, make sure you’re confident about your stock and willing to wait for it to mature.
Understand the Business and “The Bottom Line”
If you don’t understand the core business model of a company, don’t invest. A common example of this is pharmaceutical and tech companies. A guy I know invested $3 in pharmaceutical company stock and sold it for over $100. Nice trade. He then went and invested the earnings into another pharmaceutical that he didn’t know much about and lost big time. Another investor I know that now owes a couple of BANKS invested solely in consumer products like Coke. He is now worth millions.
All in all, it is recommended that you only purchase stocks of companies you possess information about. If that’s not possible, do your research or even talk to other investors. Above all, use your common sense combined with these tips, and hopefully, you’ll be able to choose the perfect stock for yourself. Before jumping into trading or investing, hire a stockbroker to make your financial journey easier.