Stock markets can be a tricky place to maneuver without the appropriate knowledge and information. Apart from picking the right stock, the most difficult decision which can make or break your investment is the timing and price of the sale of the stock. This decision is highly crucial to the nature of returns and thus must be made on precision and rationale rather than on the basis of guesswork or hearsay.
The main idea revolves around the question, ‘how to make money in the stock market?’. The answer pertains to making a well-informed decision regarding the purchase and sale to structure your investments to become profitable. The following guidelines can help an investor ascertain the correct time-period for buying or selling a stock.
When to BUY?
Investments begin in the stock market with the purchase of a stock. This stock is first identified and researched on to determine its profitability in the future. But purchase decision must hugely be influenced by the price of the stock and strength of the business and not simply based on the future expectations.
Thus, the first guideline to follow is to ascertain the VALUE of the stock. Through this value, you can establish the RIGHT PRICE to purchase the stock. It is prudent to establish a range of prices within which you would like to purchase the stock rather than one single target price. For the novice investors, they can refer to the various analysis conducted regarding the value of the stock rather than perform their own research to infer the value of the company’s stock. Some detailed notes on different methods of valuation have been shared in the education blog.
The second crucial step is to ascertain the future price you expect the stock to hit. By doing so you can identify when the price of the stock is below its expected value and thereby buy the stock at this price. Thus, by understanding the future value of the stock, you can identify when the stock is being UNDERVALUED or OVERVALUED and thus take an informed decision.
Another way to decide when to purchase the stock deals with EXTENSIVE RESEARCH of your own. By studying the latest developments of the company and the nature of growth in sales, latest plans, change in management, new acquisitions and developments in business. By analyzing such factors, an investor can predict the change in the valuation of the stock. If you believe the value to increase, then the stock must be purchased. If the company is overvalued and may tend to fall in the future, then the investor can wait to buy the stock at a lower price to increase their returns later. This is a very effective way which can give unique results to the investors and set them apart from the others in the market following the newspaper or other general reports. However, the research must be done by a person who completely understands how markets and businesses work. Otherwise the incorrectly interpreted information could lead to losses.
When to SELL?
These mentioned pointers are useful information which can help make your investments more effective and profitable since they help you in determining the best time to purchase a stock. However, this decision is only efficient if it is followed with a well-informed sale of the stock as well.
The easy part is that by identifying the right time and price to buy the stock, one already assumes and accounts for the right price when the stock should be sold.
Since investment world can be governed by fear and greed, it is important to decide on a range of price at which an investor will sell the stock. By doing so, they can avoid selling the stock earlier than required due to fear and thus lose out on the potential higher returns; and they can also look past the temptation to stay on holding the stock past the right price and reduce the profits they made.
Hence, it is very important to plan and organize the investment strategy before the investment even begins and keep revising these plans to accommodate the market fluctuations. While ‘timing’ is key with investments, it is difficult to always get it right. This is the reason, a ‘range’ with an ample ‘margin of error’ is helpful to cushion the negative effects of mistakes. The due diligence and disciplines need to be deeply integrated within the investor to remain successful.
Under some circumstances, the reason for selling out of an investment may also be governed by personal reasons rather than being market driven. A well-thought out financial plan offsets such unforeseen situations through creation of a contingency fund and other alternatives.