Do you want to buy stocks?
I want to buy stocks but I don’t know the right stocks to buy. Are you in this type of situation? If your answer is in the affirmative, one of the other thoughts that may be going on inside of you is how you can know the right time to enter the market to buy stocks. One of the characteristics of stock markets is the fluctuation in stock prices. Stock prices can go up today or this week and next week, the prices may go downward. For every change in stock price, if you are an investor in the stocks, you are either making or losing money. Essentially, the price at which you buy stocks contributes to whether you will make money and how much you will make from the stocks. However, the fluctuations in stock prices notwithstanding; there is a way you can invest which can put the odd to your favour. So, it is not just about when to buy stocks alone. You should also address other questions such as what stocks to buy and how to buy stocks. In no any particular order, the following tips will serve as guides to anyone that wants to buy stocks.
Do your homework
If you want to buy stock, don’t rush. If you rush in, you might as well rush out. This is a financial decision which involves money. Therefore, rushing in and out of the market can actually cost you money. If you want to build a house, you have to carry out a thorough planning before you start the construction. You don’t build your house halfway before you start planning on the type of building you want to construct. In the same way, you need to carry out research about the type of stocks that will meet your needs. Are you looking for growth or dividend stocks? At this stage, you can come up with five or more stocks. This will make your whitelist. You can keep adding to it as you keep finding more stocks that you consider good enough. Your whitelist are actually potential good stocks to buy. I encourage you to be a value investor. Only stocks that have good fundamentals should be among your whitelist. Your fundamental analysis should cover the earning trend of the company. Is the earnings of the company growing or declining? How is the company’s performance when compared with that of the competitors? Is the performance sustainable? What is the company’s P/E ratio? This is called price earnings ratio. This ratio attempts to compare the stock price of a company to its earnings per share. This ratio will help you to predict the number of years it will take the investors to recoup their investment if the earning per share remains at the same level and all the earnings are distributed to the shareholders. Although we know that it is not possible for a company to distribute all its earnings, it is believed that any undistributed earnings will possibly enhance the value of the stocks in one way or the other. Another ratio close to that is the price to book value ratio. How does the current price of the stock compared to its original book value? This ratio will give you a clue as to whether the stock is over-priced or under-valued. An under-valued stock is actually a very attractive investment opportunity. Nevertheless, you may carry out further investigation to know why the price of the stock is below is book value. It may be as a result of government legislation which may have long term adverse effects on the company. If this is the case, such will become unattractive stock to buy.
Read Also: Investing in Stocks: A Beginner’s Guide
If you want to buy stocks at good prices, you need to be liquid. That is, you need to have cash which you keep for that purpose. You keep watching the prices of the stocks in your whitelist. How do you know when it is the right time to buy stocks? It is good to buy stocks when the stock price suddenly fall due to market rumours and hypes which may not have anything to do with the fundamentals of the stocks. But you need to do this with caution. At times, market sentiments can be true. You need to find out exact reasons why the price of the stock suddenly falls. In most cases, stock prices will fall when supply is more than demand. For instance, people usually offload their stocks during holidays or school resumption period when parents need to pay for their children’s school fees. In such cases, it can be a good time to buy stocks for people who have cash to invest in shares. On the other hand, people sell stocks with the fear that market may crash. This usually happens when stock prices have been rising consistently over time. It will get to a point that many investors will begin to take profits. When other investors realise that people are selling their stocks, they may not want to lose all their gains back to the market. The result is that, people will continue to sell and this will take toll on the stock prices. In this circumstance, you should wait till the time the prices have reached the bottom and has continued to rise again. It is good to buy stocks when you see the sign that the stock prices have started rising. It is somehow dangerous to buy stocks when the prices are at their lowest bottom. There is no way you can know with all assurance that the market has reached the bottom. However, if you are a value investor, buying stocks at the lowest prices will not be your target. You will only be concerned about whether the stock price is fair enough. Once you are convinced that the price is good enough, then, it is the right time to buy stocks.
Invest long term
Remember that I said in this article is not just about when to buy stocks, it equally addresses what stocks to buy and how to buy stocks. If you have been following me, I think I have touched the two questions, when to buy stocks and stocks to buy. In case, you didn’t get the points so far, I have said that you should buy stocks when their prices are good enough and not necessarily when the prices are at their lowest. Also, about the stocks to buy, I said you should only buy stocks that are having good fundamentals. On how to buy stocks, I will say that you should buy stocks with long term perspective. It is not good to invest the money you may need within short term period in stocks. You may not necessarily invest for a long time. There is nothing bad in selling your stocks when you know that you have made enough profits. But you should not be forced to sell stocks when the prices are not favourable just because you need the money very urgently. Before I forget, it is not advisable to borrow money to buy stocks. Some have done this and ended in debts.I remember the last time that the stock market crashed, it affected a lot of people including stockbrokers. In fact, some are still yet to recover from it. You can imagine paying back the money you lost. That is double loss. So be guided.