When should you buy or sell a stock?

Summary

• Even as analysing when to purchase a stock can be tricky, cracking the code can boost your returns.
• Since investors and traders are expected to take their buy or sell calls within no time, it is difficult for them to consult or read lengthy financial reports.
• Establishing a price range and employing Discounted cash flow (DCF) technique can help in deciding when to buy or sell a stock.

Timing a stock market is a tough task. Not even the best in the business is able to always time the market and maximise their profits. There are times when even the best bets fall flat on the face. Since investors and traders are expected to take their buy or sell calls within no time, it is difficult for them to consult or read lengthy financial reports. Thus, how, and when are you supposed to buy or sell shares?

Even as analysing when to purchase a stock can be tricky, cracking the code can boost your returns. Here, we will discuss a few common strategies for when to buy, sell or hold a stock. However, you are advised to consult your financial planners before adopting the strategies since investing in stock markets without proper guidance is risky.

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Establish a price range

It is vital for investors to establish a price range at which they can purchase a particular stock. The financial reports by analysts provide a good idea about such price ranges. There are reports which include consensus price targets, which are averages of all analysts’ opinions. These numbers can also be found on several financial websites.

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Generally, the period after stock price corrections is said to be ideal when investors can buy at bargain prices. In case of an oversold stock, investors can decide if they are ‘on sale’ and expected to surge in the coming days.

Discounted cash flow analysis

Even as a price range is very helpful in deciding when to buy a stock, a lot of information is needed to do so. There are several ways to determine if a stock is over or undervalued. It is done by estimating the prospects of growth and profit of a company. The valuation technique Discounted cash flow (DCF) plays a critical role in reaching conclusion in this matter.

DCF considers a firm’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. Generally, a stock is considered a good buy if the current stock price is below this target. Dividend growth and PE ratio are also some of the useful metrics.

Do your homework

Depending on analysts’ price targets is a good approach for starters, but investors can also analyse a company’s financial report on their own and decide accordingly in the long run. You can easily locate a company’s annual report either on its website or exchanges and analyse. You can also check its most recent releases and investor presentations to remain updated.

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Other critical factors to look at:

Growth in sales:  You should not only check if the sales of a company are rising but also their sustainability. It is also important to learn what the company’s management said about the quarter. Investors should compare a company's growth in sales not only from last year but from last quarter for a wider idea.

Improving margins:  The margins of a company highlight how well it is managed. Investors must take a close look at the company’s overall financials if the sales line is on an upward trajectory, but costs are escalating at a faster rate. However, it is not necessarily the bad news since the company might have entered into a new business, launched new products, or started operations in new territories. However, it could also mean that the company is not able to properly manage its expenses.

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Guidance: The company’s guidance for the next quarter also provides a good idea about how the stock price would move going forward. If a company cuts down its estimates for the current quarter but raises its full-year estimate, then the stock will probably take off. On the other hand, the stock may sell-off if the company raises guidance for the ongoing quarter but downplays long-term expectations.

The bottom line

Since investors and traders need to analyse the performance of companies in quick time and make buy or sell move accordingly, analysing the above-mentioned pointers can help them avoid a rash decision. However, you must always consult your financial planners before going ahead.

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