DT15
2022-10-18

Questions on when to buy, sell or hold stocks.


Buying and selling stocks can sound exciting, complicated, and confusing all at once. But it does not have to be. The first step to understanding when to buy and sell stocks is knowing how a stock market or stock exchange works.




The first thing to know: There is not just one stock market—there are many stock exchanges and markets worldwide through which people buy and sell stocks, or shares of a company.




Stock markets or exchanges consist of lots of people buying and selling at different prices because they all have different ideas about those stocks’ value. One investor might think a stock will go up, while another thinks it’s going to go down. So who’s right about when to buy stocks?




Understanding When to Buy and Sell Stocks




The fundamentals of when to buy a stock and sell a stock comes down to the basics of how a stock market works. The idea is to buy low and sell high: If you buy a stock for $1 and sell it for $2, then you have made a profit.




In the short term, any given stock could go up or down on any given day, for a variety of reasons. Perhaps the fundamental business behind the stock is bad and the company is going to lose money. Or the stock price could change because of a report from an analyst, a rumor about coming business actions, or overall economic news.




Because of all that volatility, it can be risky for individual investors to buy and sell stocks to make a profit, so many investors prefer investments like ETFs, index funds, or mutual funds, which contain many stocks in one neat package.




Keep in mind, past performance is no guarantee of future results. 




It can be hard to know when to buy and sell stocks, even for professionals. Money managers try to beat the market by actively buying and selling stocks instead of investing in funds.




Even if a passively managed index fund might be a better long-term investment, there are still lots of reasons people want to trade stocks: because they enjoy it, because they want to take a more active role in their financial goals, because they want to make specific choices with their investments (like investing in socially conscious businesses or in businesses they support).




For individuals looking to start investing, there are certain concepts to know: diversify, start small, focus on overall investing, and have long-term goals. Most importantly, one needs to know when to buy and sell.




How Do You Know When to Buy a Stock?




When an investor has done their research and feels confident that a stock price will rise in the short or long term, and that they’re willing to hold onto it until it does, that’s the right time to buy a stock.




It helps to be informed when considering whether to buy stocks, and one way to do that is to learn about the company itself. Interested investors can find many company’s financial reports and earnings reports


While ultimately it can be a good idea to buy stocks across different industries in order to diversify, it sometimes helps to start with a business or industry one is familiar with. Knowing about the company can help put the earnings reports into context.




Understanding the value of stocks is always tied to understanding the business those stocks represent a share in. Is the company a good investment? Does it have sound financials and growth potential? Here are helpful questions to consider when contemplating buying a stock:




What is the price range at which you’re willing to buy? 




If an investor has a company in mind, setting a price range at which they would want to buy stock in that company may help inform their decision. One can do this through analysts’ reports and consensus price targets, which average all analyst opinions.




Does the stock appear undervalued?




There are different ways to determine value. The most common valuation metric is a price-earnings ratio (or P/E), which takes the price per share and divides it by earnings per share. The lower the number, the less the value. Generally for companies, a P/E below 15 is considered a good value and a P/E over 20 is considered a bad value. You can also compare the company’s P/E to others in the industry.




Another way to look at value is a discounted cash flow (DCF) analysis, which takes projected cash values and discounts them back to the present. This ultimately gives an investor a theoretical price target; if the actual price is below the target, then in theory it’s undervalued and a good buy.




Does the stock offer dividends? 




A stock that distributes profits in the form of dividends to shareholders isn’t necessarily a better investment, but dividends have played a notable role in investor returns during the past 50 years. 




The key is to stay informed and make investing decisions based on sound research. It can be tempting to follow the trendy stock, but sometimes it’s more hype than it is worth.




How Do You Know When to Sell a Stock?




Just as an investor can set a price range about when they want to buy a stock, they can also set a price range for when they want to sell. It pays to stay on top of the stock value—and when the valuation no longer justifies the price, it may just be time to sell.




In general, if you buy a stock, you’re going to want to hold onto it for a while. When an investor buys an undervalued stock, it could take a few years for it to reach its correct valuation. And of course, there’s always a risk it will never reach what the investor has determined is the correct valuation.




Not everyone holds onto their stocks for a long time, but there are risks to day trading—when people try to make trades up and down every day. Investors who do this often, lose money.






When Is the Best Time to Buy Stocks?




The answer depends on your level of trading experience. If you consider yourself to be:




• A beginner, you may want to aim for the middle of the trading day when stock prices are least volatile.




• An experienced trader, you may want to aim for the start of the trading day, when stock prices tend to be the most volatile.




As a beginner or without the right research, it can be hard to tell when exactly is the right time to buy or sell a stock with a wildly fluctuating price. More seasoned investors will likely have a better understanding of trends and what the optimal buying and selling points are for a particular stock.




When thinking about the best months to buy stocks, examining historic performance can be helpful.




What are the reasons to sell stocks?




There are a number of situations in which an investor might decide to sell a stock.




A Loss of Faith in the Company




An investor might have bought a stock with hopes of promising returns, or because the stock was reasonably priced when they bought it. But if it now appears that the tables have turned and the business fundamentals are on the decline, it might be time to consider reinvesting those funds elsewhere.




Some causes for concern might be if the company has an increase in competition, declining profit margins, legal problems, or new questionable leadership. Still, it’s crucial to identify if these changes are short-term and will adjust shortly or if they have long-term consequences that may change the business for good.




Opportunity Cost




Opportunity cost is when the cost of one decision comes at the cost of making another. In other words, when you spend your money on one thing, you cannot spend your money on another.




This concept can be applied to investing in stocks. When you invest in one stock, you may not have the funds to invest in another. Therefore, an investor would want to evaluate every investment decision to determine if their money could potentially be more profitable elsewhere.




The Stock is Overpriced




When comparing stocks, investors often use the price-to-earnings (P/E) ratio to value a stock. The higher the number, the higher the price is in comparison to the earnings of the company.




However, this data alone may not illustrate whether a stock is going to perform in the future. Adding other data points such as historical ratios and earning multiples of competing companies may help investors decide if they are priced reasonably or overpriced. If the stock is overvalued for any reason, it may be time to reconsider the investment.




A Need for Liquidity




There may come a time in an investor’s life when they need to sell a stock for personal reasons, such as to free up cash for an emergency expense. For an investor in this situation, it’s wise to evaluate each stock they own to determine the best stock to sell.




One way to start: Assess which stock has the worst-looking prospect for future growth. Or an investor might decide to sell the stock based that would yield the least tax liability.




To Avoid Capital Gains Tax




While taxes shouldn’t be the sole driver of selling a stock, sometimes they weigh heavily on an investor’s decision to sell. This is because when an investor purchases stocks outside of a retirement account, any gains are subject to capital gains tax.




It’s possible to offset some of the capital gains taxes by buying stocks at a loss. This strategy—known as tax loss harvesting—is sometimes automated, and sometimes not, but if an investor is considering it, they might want to consult with a tax professional before moving forward.




Portfolio Adjustment




Investors with diversified portfolios may need to sell some stocks from time to time to rebalance their investment mix. Rebalancing your portfolio allows you to review the assets you’ve invested in and confirm that the percentages are still suitable for your goals and objectives. If not, an investor may have to sell some assets while buying others.




How Do You Know When to Hold Stocks?




Knowing when to hold a stock often comes down to one’s investment strategy. With a passive investment approach, investors invest in various stocks with the intention of holding them for an indefinite amount of time. This is also known as a buy and hold investment strategy.




One benefit of the buy & hold strategy is that the tax rate on long-term capital gains (from stocks that an investor has owned for more than one year) are much lower than that of short-term capital gains.




The Takeaway




Knowing when to buy, sell, and hold stocks can be less confusing when an investor does the research into company health, overall market conditions, and their own financial needs as relates to personal short-term and long-term goals.




One of the easiest ways to buy and sell stocks or manage any investment portfolio is to open an online taxable brokerage account. This is often appealing to investors who want to take more of an active investing approach and buy and sell stocks. Investors would typically pay fees based on the account and the number of trades they make.




For investors who prefer a more passive approach, there are other options. With an automated investing platform, investors can put their money in ETFs that mimic the financial indexes. Another option is to open a wealth management account and have more guidance in your financial strategy.


Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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