How to Know When to Buy, Sell or Hold Stocks
Updated December 23, 2024.
One of the most important elements of investing is knowing when to buy, hold, or sell stock. So in this article, we're going to examine some of the factors you may wish to take into consideration.
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Examine Sales Growth
Firstly, it is important to assess a stock over a period of time, as well as examining short-term trends. This can pad your trading strategy since you could potentially identify an attractive price point. For example, if you see evidence of growing sales over a period of time, this would suggest longevity to equity which indicates long-term credibility. Put simply, this is a buy-and-hold indicator.
That said, it is easy to know when to buy a stock, but what about selling a stock? What if you have earned a profit, but you potentially miss out on additional gains? What if the stock falls? Should you hit the "sell" button?
Ultimately, it is critical to identify the price at which you want to sell, no matter what. Still, there are signals to monitor:
- Changing fundamentals (sales are weaker or a new CEO).
- The company slashed its quarterly dividend.
- If your profits exceed 20%, especially in a short time span, it might be time to sell.
Look at Margins
Margins are an essential aspect of the financial markets because they refer to the amount of equity that an investor possesses in his or her brokerage account. So, when the term "buying on the margin" is used, it references money borrowed from the broker to acquire investments. The equity margin is between the market value of the stock and the loan amount (number of shares x the price x the margin rate).
If you notice that the margins of a particular stock are declining over time, this can indicate that the company is being poorly managed. Therefore, it would point to a selling decision being the right course of action. However, it's vital to investigate further, as the data could reflect, for example, that the company is launching a new product or expanding its operation.
Read Earnings Guidance
Get hold of any earnings information you possibly can, and note how that data applies to any expectations on Wall Street. If there is a significant distinction between the two, this can be an excellent buy or sell signal, depending on the specifics.
For a bearish earnings report, you should keep a lookout for these words:
- Renegotiate
- Overstatement
- Foreclosed
- Unpredicted
- Non-Performing
- Recalculate
- Precipitated
For a bullish earnings report, these are some of the common words that signal a positive conference call and news release:
- Amazing
- Excellence
- Terrific
- Steady
- Competitive
- Just a Temporary Blip
Earnings reports, specifically from the major corporations, dominate the business news cycles. This can impact the performance of a stock, sending it either higher or lower in after-hours and pre-market trading. How the news reacts is important for traders because perception is everything!
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Look Out for Stock Buybacks
If a company is buying back a large amount of stock, it could appear to be both a bullish or bearish indication for the organization. This is something to take into consideration. It all depends on the circumstances.
Unfortunately, there is no one specific direction a stock can go if companies engage in share purchases, also known as stock buybacks. So, is this a time to buy, sell, or hold the security?
Here are the positive components to an earnings report:
- Enhance shareholder value.
- A jump in share price.
- The use of excess cash.
On the other hand, here are the negative elements to earnings reports:
- A signal that the company is not bullish in the future.
- Buybacks might shield the company from controversial issues, like excess internal compensation.
- The company might be using too much debt to buy back the stock, particularly in a low-rate environment.
Identify New Products
Is Apple about to release an impressive new iPhone upgrade or stellar wireless headphones? When the tech titan unveils a new suite of products and the press event receives positive publicity, this is great for the stock. These are crucial events that force investors to monitor since these PR campaigns could be signs of the future.
Capturing the Zeitgeist
The market moves particularly fast, but sometimes it is possible to perceive that a company is really capturing the cultural zeitgeist. Anyone that is manufacturing a product or providing a service that is particularly voguish will have strong fundamentals and be ripe for buying.
Assess Trends
Always assess stock charts over the last five years, note seasonal variations, and what the overall trend of the stock might be before making a potential move.
When it comes to buying, selling, and holding stocks, it is imperative to assess trends. These could offer indicators on how a stock could perform today, tomorrow, or next year, based on good old-fashioned fundamentals.
But how do you even assess stock trends? Well, there are multiple factors to be considerate of:
Technical Indicators
Technical indicators offer investors a chance to utilize various factors to get ahead of a stock's performance, either upward or downward. Relative Strength Index (RSI), Moving-Average Convergence/Divergence line (MACD), and stochastic oscillator (STC) indicator are the most widely used technical indicators.
Macro Trends
Macro trends can provide you with details surrounding how external factors could impact the direction of a stock.
Will the government raise corporate taxes, potentially eating into revenue? Will the central bank cut interest rates to make borrowing cheap? Are consumers optimistic or pessimistic of the future, based on various surveys?
It is these components that can drive the short-, medium-, and long-term movement of stocks.
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Are Stocks an Exact Science?
Is buying, selling, and holding stock an exact science? If it were, everyone could be a millionaire by getting involved in the stock market. That said, you can employ measures to ensure that you are adequately equipped to make the best decisions for your trading portfolio. From technical indicators to macro trends to earnings reports, you could potentially find patterns that other investors may not, giving you an advantage over your peers, which translates into profits!
