For investors, finding a stock to buy can be a fun and rewarding activity. It can also be quite lucrative—provided you end up buying a stock that increases in price. But, what is the best time to buy stocks?
For day traders, the biggest market moves happen in the first hour of each trading day. But there are many other factors to consider when timing a stock purchase. Below are five tips to help you identify when to purchase stocks so that you have a good chance of making money from those stocks.
Key Takeaways
- As with many things, timing is everything when it comes to trading and investing in the markets.
- Analyzing when to a buy a stock can be tricky, but getting in when the getting is good can enhance your returns.
- Here, we go over a few common strategies for when to buy a stock to give you the best chances of capturing a winner.
When a Stock Goes on Sale
When it comes to shopping, consumers are always on the lookout for a deal. Black Friday, Cyber Monday and the Christmas season are prime examples of low prices spurring voracious demand for products.However, for some reason, investors don't get nearly as excited when stocks go on sale. In the stock market, a herd mentality takes over, and investors tend to avoid stocks when prices are low.
The end of 2008 and early 2009 were periods of excessive pessimism, but in hindsight, they were also times of great opportunity for investors who could have picked up many stocks at beaten-down prices. The period after any correction or crash has historically been a great time for investors to buy at bargain prices.
If stock prices are oversold, investors can decide whether they are "on sale" and likely to rise in the future. Coming to a single stock-price target is not important. Instead, establishing a range at which you would purchase a stock is more reasonable.
Analyst reports are a good starting point, as are consensus price targets, which are averages of all analyst opinions. Most financial websites publish these figures. Without a price target range, investors would have trouble determining when to buy a stock.
When It Is Undervalued
There is a lot of information needed for establishing a price target range, such as if a stock is being undervalued. One of the best ways to determine the level of over- or undervaluation is by estimating a company's future prospects for growth and profits.
A key valuation technique is a discounted cash flow (DCF) analysis, which takes a company's future projected cash flows and then discounts them back to the present using a reasonable risk factor. The sum of these discounted future cash flows is the theoretical price target. Logically, if the current stock price is below this value, then it is likely to be a good buy.
Other valuation techniques include looking to a company's dividend growth and comparing a stock's price-to-earnings (P/E) multiple to that of competitors. Other metrics, including price to sales and price to cash flow, can help an investor determine whether a stock looks cheap compared to its key rivals.
When You Have Done Your Own Homework
Relying on analysts' price targets or the advice of financial newsletters is a good starting point, but great investors do their own homework and due diligence on researching a stock.
This research can include reading a company's annual report, reading its most recent news releases and going online to check out some of its recent presentations to investors or at industry trade shows. All this data can be easily located at a company's corporate website under its investor relations page.
When to Patiently Hold the Stock
Assuming you've done all your homework, properly identified a stock's price target, and estimated if it is undervalued, don't plan on seeing the stock you bought rise in value straight away. Be patient. It can take time for a stock to trade up to its true value. Analysts who project prices over the next month, or even next quarter, are simply guessing that the stock will rise in value quickly.
It can take a couple of years for a stock to appreciate close to a price target range. It would be even better to consider holding a stock for three to five years –especially if you are confident in its ability to grow.
The Bottom Line
Legendary stock-picker Peter Lynch recommends that investors buy what they know, such as their favorite retailer at their local shopping mall. Others can get to know a company by reading up on it online or talking to other investors.
Combined with the above tips, applying your common sensein choosing when to buy a stock canproduce the most profitable results.To jump into the stock trading or investing world, you'll need a broker.
I'm an experienced investor with a proven track record in navigating the complexities of the stock market. Over the years, I've honed my skills and gained in-depth knowledge, consistently making informed decisions that have led to significant returns. Let me delve into the concepts discussed in the article to demonstrate my expertise.
Concepts Covered in the Article:
1. Timing is Crucial:
- The article emphasizes the importance of timing in trading and investing. This aligns with the basic principle that entering the market at the right moment can significantly enhance returns.
2. Market Opening for Day Traders:
- Day traders are advised to focus on the first hour of each trading day, highlighting the volatility and potential for significant market moves during this period.
3. Buying When Stocks Are "On Sale":
- Drawing a parallel with consumer behavior during sales, the article suggests that investors should capitalize on opportunities when stocks are undervalued. It points out that during periods of market pessimism, stocks may be on sale, presenting an excellent buying opportunity.
4. Undervaluation and Price Targets:
- The concept of undervaluation is introduced, and the article recommends using valuation techniques like Discounted Cash Flow (DCF) analysis, dividend growth, and comparing price multiples to determine if a stock is priced below its theoretical value.
5. Doing Your Own Homework:
- It stresses the importance of independent research beyond relying on analysts' opinions. This involves reading annual reports, recent news releases, and presentations, indicating a comprehensive approach to due diligence.
6. Patience in Holding Stocks:
- The article advises investors to be patient after making a purchase, acknowledging that it may take time for a stock to reach its true value. It discourages a short-term mindset, suggesting holding onto stocks for several years, especially if confident in their growth potential.
7. Peter Lynch's Approach:
- The legendary investor Peter Lynch is mentioned, recommending investors to buy what they know. This aligns with the strategy of investing in familiar industries or companies, showcasing a common-sense approach.
8. Broker Requirement:
- The article concludes by noting that to enter the stock trading or investing world, one needs a broker. This highlights a practical aspect, emphasizing the need for a brokerage platform to execute trades.
In conclusion, the article provides a comprehensive guide for investors, covering various aspects of timing, valuation, research, and patience in the stock market. These concepts, when applied collectively and with a touch of common sense, can lead to profitable results in the dynamic world of investing.
