How to Know When to Buy Or Sell Stocks

The timing of your market interventions - I mean when you move in to buy or sell off stocks - will be a key determinant of how successful you become as an investor and, the bottom-line, how much money you make or lose. Granted that it won't be necessary or desirable to engage in regular daily or even weekly/monthly trading of stocks (read this) for you to earn satisfactory returns, you still have to know when it should be in your interest to take action.

The truth is that, when the market opportunities emerge, it would be unwise, almost irresponsible, not to take advantage. Or not to respond to a potential threat to your investment. Opportunities present for both buying and selling, and you accelerate your progress when you continue to tap into them. So, what should guide your buying and selling decisions so that you optimise the returns you generate from your stock investments?

The Buying Decision

• Price Base
  You've probably heard it before: aim to buy low and sell high. One way to do this is to get in when a market correction or bear market has pushed a stock's price to a bottom, making it a bargain buy. Because of investor sentiment that goes with a deep decline - resentment, anger, disappointment, expectation of more woes, etc - don't be surprised that not every investor would take a chance with the stock at that point. There are problems though. If your timing is faulty (the decline hasn't bottomed out), you could still lose money. Secondly, not every decline gives birth to a quick recovery, if it comes at all. So, you risk a long wait or plain dead weight. The lesson: it's not just low price; do your research to be sure the fundamentals support a purchase decision.
• Earnings Growth
  If you are to wait for a bear market that pushes prices to the floor, before you buy, your purchase opportunities become limited and you may be in a long wait. Other important factors can point you to good buying opportunities, even at current market level. Earnings growth is one. Without earnings growth, a company provides no strong incentive for its stock to move in value. When a company's earnings begin to show a strong growth trend, smart investors pay attention, because, if sustained, the market will soon react to that development. Look too at the details - how sales grew (or are exceptional items responsible?) and how other key ratios are pan out. What level and span of growth should excite your interest. At least consistent for three or more quarters. 20% or more should be good for our economy that is yet to get into good rhythm. How do you know if earnings are growing? They get reported. Those quarterly results are therefore important and you need to track the trends they're showing on company performance.
• A Bull Run
  The market is suddenly on a bull run or a particular stock zooms up, hitting new record levels, what should you do? If you thought you should only buy when the price is at its floor, you will pass up such opportunities. A rising price trend is, however, your best opportunity to earn from a stock, provided you do not move in when the price has peaked. That would obviously be a late response, unless we are looking at a short, fleeting flash of price gain, which shouldn't bother you. Look for buy opportunities in a rising price trend and ride such winning stock(s) to accelerated wealth. That's easier than waiting for a probably dead stock to rise from its valley.
• New Products, Investments, etc
  One way the fortunes of a company can record dramatic improvement is when fundamental changes that impact on operating capacity occur. Take new product launch. A drain on resources if unsuccessful, but could prove a major boost. If your research supports the product's market success, that's probably a time to buy. Ditto new major investments (subsidiaries, expansion, etc). Or significant restructuring, including management changes. You need to evaluate that change to form an opinion on its likely impact.
• Major Portfolio Purchases
  Think of what happened each time Pencom (the pension funds regulator) released funds to pension funds administrators. At other times, it could be foreign portfolio managers. The point is that when a particular stock or group of stocks gets targeted by major institutional investors and portfolio managers, they mop up the stock and invariably create a dearth of supply. For as long as that mop-up continues, prices will keep heading up. When such situations present, it's a chance to earn a good margin. How do you know when? You have to track market developments.
• Major Sectoral Changes
  When significant changes occur which, to any discerning person, will fundamentally affect companies in a particular sector of the market, it's a good time to watch out. Take bank consolidation in Nigeria and the repositioning of the banks that emerged from it. Take the NAFDAC war on fake drugs and the salutary impact on the performance of the pharmaceutical sector. In these and similar circumstances, the positive results invariably boost stock prices. When fundamental changes begin to occur - as a result of specific government policy, general economic growth, shifts in consumer behaviour and such other factors that have huge potentials to fundamentally affect corporate performance in any sector - do further analysis on the potential negative or positive impact. Is it time to buy?

The bottom-line is that you need to sniff out buying opportunities before they are obvious to every, if you desire a market advantage. That won't come easy, because it requires consistent monitoring of the market, the companies and the economy. That, too, may require some tools of analysis, but more importantly, you have to develop a means to keep track of what happens each day that may have implications for your existing investments and the opportunity to buy more. One basic step towards this is to pay attention to financial news and reports: online, on TV or radio, in newspapers and magazines, etc.

Next»: When to sell

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