When to Buy and When to Sell: Stock Basics

While everyone knows the tropes of some Wall Street banker screaming “Sell! Buy! No, sell!” into a telephone, not everyone understands the basics of the stock market. Essentially, the stock market is a way to invest in shares of a publicly traded company. Investing in the stock market can be quite lucrative, assuming you know how to buy and sell like a pro.

Today we’re going over some basic rules of thumb to help guide your purchasing and selling. Remember, past performance is never a direct indicator of future changes. However, understanding historical patterns is a big step towards understanding what current trends could indicate. Let’s get into some tips and advice.

Stock at Low Prices

Investors are notoriously skittish. When stock prices start hitting lows, the average stock investor steers clear of it. The ample supply and low demand often means that the stock maintains its low price until confidence is restored. This often makes low stock prices ample times to buy in on the cheap. If the stock never bounces back, you’re not out much. If it does bounce back to its previous highs, you make out like a bandit.

This might sound like a cliché, but it’s an old truth. You should always buy when the stocks are low, and sell when they’re high. Doing anything else is playing a scared, defeatist strategy in a world won by the boldest operators.

Knowing When to Buy

For each stock you’ve got your eye on, make sure you know what range you’d be comfortable buying it at. That’s not to say you mark down a hard dollar amount, above which you’d never buy it. Instead, look at a price range. If a stock has been high for years but then drops closer to your range, you might wait to see if it falls further. Once it shows signs of resurgence, though, you should go ahead and snap it up so you can ride that momentum.

Do Your Research

It’s important that you do your research. There are ample resources online that can help you learn more about how to value stocks. Notably, figuring out when stocks are under- or over-valued is important when you’re making your buying decisions. The main way to find out whether a stock is undervalued is by using valuation techniques. These can be somewhat complex and involved, but here are some of the basics.

Essentially, valuation techniques are ways that financial advisors and stock managers look at given company’s stock prices and compares them to the company’s projected profits. These formulas are strictly speculative, of course, as no one can tell the future. However, these formulas tend to be time-tested and bear out over longer time periods and across wide sample sizes. When a stock is undervalued, that’s the time you should buy it.

Patience in Selling

It’s a rookie mistake to sell out of a stock right as it begins to shoot up in price. Maybe you bought stocks in a company that just posted three profitable quarters in a row and had its stock prices double. It can be tempting to go ahead and cash out, getting a return on your investment and a contented feeling of success. However, this is usually not the case.

Typically, an undervalued stock could take years to begin trading at its true value. While analysts might project it will go up, that doesn’t mean it’s trading where you want it yet. As such, riding out the stock for a few years and waiting for it to grow naturally is your best bet before you sell out of it.