7 Tips On When To Buy A Stock And When To Sell A Stock

Last Updated July 23rd 2021

7 Min Read

With an array of stocks available in the market, finding a stock to invest in can be a fun and productive activity for investors. When you end up buying a stock that can make you a millionaire in time, it can be quite a lucrative activity too. But when is the right time to step into the stock market?

Here are seven tips for investors to help them identify the best time to buy a stock and when to sell them so that you have a good chance of securing a wealthy future from these stocks.

Key Takeaways

When it comes to trading and investing in the stock market, the first and foremost thing is timing.

With multiple stocks available, analyzing when to buy it can be a bit confusing. The tip is to get in when the getting is good to enhance your returns.

Here are a few common but effective strategies to buy a stock that can ensure you the best chance of catching a win.

Tips: When To Buy A Stock And When To Sell A Stock

When A Stock Is On Sale

Consider buying a stock as if you are on a shopping spree. Consumers always look forward to a deal when it comes to shopping. The prime examples of low prices spurring the demand for products are during the Christmas season and Cyber Monday.

But in the stock market, for some reason, investors are not as excited when a stock goes on sale. The usual mentality for all investors is that they tend to avoid stocks when prices are low.

The end of 2008 and early 2009 were the times of great opportunity for investors. The stocks were at a beaten-down price, which was the best time to pick up stock for a future return. It was the best time for investors to buy stocks at a bargain price. But on the contrary, these were the periods of excessive pessimism in the stock market.

Once the stock prices are oversold, it is easy for investors to decide whether they are “on-sale” or will likely rise in the future. It is imperative to establish a range at which you would purchase a stock rather than coming to a single stock-price target.

One of the best starting points is analyst reports and consensus price targets. These are an average of all available analyst options. Investors would face crucial trouble in determining when to buy a stock without deciding a price range. These figures are published on almost all financial websites and are easy to refer to.

When A Stock Is Undervalued

Identifying whether a stock is undervalued is one way of establishing a price range. Analyzing the estimated growth and profit of a company’s future is the best way to determine the level of over or undervaluation of the stock in the market.

Discounted Cash Flow (DCF) is one of the crucial valuation techniques. It takes into account a company’s future projected cash flows. By using reasonable risk factors discounts them back to the present. The theoretical price target is thus the overall sum of these discounted future cash flows. Therefore, the stock will likely be a good buy if the current stock price is below this value.

Analyzing a company’s dividend growth and comparing a stock’s price-to-earnings (P/E) multiple to that of a competitor is another valuation technique to determine when to buy a stock. Looking at the price to sales and price to cash flow is yet another metric to determine whether a stock looks cheap compared to its key rivals.

After Detailed Homework

There is nothing wrong with relying on analyst’s prices and advice in the financial newsletters. It is a good starting point. But the significant part is to do your homework. Great investors decide when to buy a stock and enter the market after due diligence and contemplation of researching a stock.

There are multiple ways to do detailed research. Some are reading a company’s annual report, following its most recent news releases, and checking out some of its recent presentations available online or even at industry trade shows. You can find these data easily under the investor relations page on every company’s corporate website.

Just After A Merger

The best tip on when to sell a stock is to sell it immediately after a merger. The price at which a company was bought is its average takeover premium, which probably ranges between 20-40%. If you own a stock that is acquired for being a premium, it is always best to sell it immediately.

Though there are merits in holding stock after the merger, from an opportunity cost perspective, it is always best to find an alternative investment opportunity having better upside potential.

Tracking The Technical Indicators

The best way to decide when to buy a stock or sell a stock is to analyze the stock chart for the last five years. The way to estimate the value of a stock for the long haul is to keep track of the technical indicators. This include the seasonal variations of the stock price, is the stock trading above or below its average, does it trades millions of shares per day, etc

Analyzing the volume of the stock is a helpful indicator. If the stock volume has decreased, it probably could be a sign of less interest in the share, leading to a decline in its share price. If it has shown a recent increase, it shows that the underlying fundamentals are solid, and the stock has higher growth opportunities.

Tracking The Macro Trends Are Crucial

Keeping track of technical indicators doesn’t mean negating the macro trends that might impact the stock. A few metrics that will help investors decide when to buy a stock or when to sell it are, analyzing its rising interest rates, higher taxes, consumer behaviour, etc. These common trends also form a crucial part of investors’ research.

Holding A Stock Patiently

Consider that you have already done your research, identified a stock’s price target, and has an estimation that the stock is undervalued. Do not plan on immediate investment. The stock market is unpredictable. Everything you have done doesn’t mean that the stock you bought will rise in its value straight away.

It takes time and patience to be a great investor. A stock takes time to trade up to its true value. Be it the analysts who project prices over the next month or even the next quarter. The estimation is the same as they are also guessing that the stock will rise quickly.

Suppose you are confident in your research and the stock’s ability to grow. It is always better to hold your stock for almost three to five years. Usually, it takes quite a few years for a stock to surge close to a price target range.

When To Buy A Stock And When To Sell A Stock: The Bottomline

The legendary stock-picker Peter Lynch has a good tip for investors. He recommends investors to buy what they know; it can be their favourite retailer at their local shopping mall. Later, to analyze a company, one can read about it online, research, or talk to other investors.

Combining all the seven tips and then using your common sense. Thoroughly decide when to buy a stock and when to sell it. This can give you the most profitable result in the future.