Finding stocks to buy can be a fun and rewarding activity and deciding when to sell a stock is also an important decision. In this article, we will answer two of the most repeated questions: When to buy and when to sell stocks.
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| When to Buy and When to Sell Stocks? |
When to Buy or Sell Stocks? A Beginner's Guide
Buying stocks or selling shares are two of the most complex decisions that we must make when investing in the stock market since they depend on multifactorial circumstances in which the opportunity cost intervenes at the time of deciding.
It is convenient for you to pay attention to the factors that influence the buying and selling of stocks, and I am sure this will be very useful when you start investing in an initial public offering (IPO).
When to Buy Stocks?
When you invest in an IPO, the objective is to buy those shares that trade below their intrinsic value, with a wide margin of safety, and that meet requirements such as solvency or good business quality.
The required safety margin will depend on the risk you want to assume for each operation. At a minimum, I recommend that you have a 20% safety margin.
To invest in a company, it is very important to understand the business where you are investing. If you do not understand the business, it is preferable that you stay out of the operation.
To understand the business you must analyze the set of variables, including:
- Competitive advantages of the company
- Risk-benefit ratio
- Company solvency
- Management team
- Growth expectations
If you analyze these variables and observe that the company is risk-free and represents a good investment opportunity, you should proceed to carry out the key considerations before buying the shares.
Factors to Consider before Buying Stocks
Before investing in the stock market, it is convenient to take into account the variables that can directly affect your investment, transforming it into a winning or losing operation.
- Company risk
- Broker commissions
- Diversification
- Position size
- Taxes
If you take these factors into account before buying the shares, you will be able to avoid making some of the most common mistakes that greatly affect the bottom line of your investment earnings.
Example of When to Buy Stocks
You value a company's stock at $ 80. Your margin of safety is 20% based on your investment strategy.
Therefore, you calculate at what price the company would have to trade to have a 20% safety margin.
$ 80 x 0.2 = $ 16 → 80 - 16 = $ 64.
The company must trade at $ 64 to have a 20% safety margin if you take into account that the company's valuation is $ 80 per share.
When to Sell a Stock?
Knowing when to sell is finding a balance between greed and fear. With a perfect marketing strategy, you may be able to keep human emotions out of the decision-making process.
It is very difficult to find companies in which you can be invested forever, so you have to learn to sell stocks at the right time.
Variables to Consider Before Selling
To decide if you should sell the shares, you must analyze the main variables that will affect this decision.
You should sell the shares when there are other companies that offer you a better risk-return ratio. You can sell something undervalued if you have a better option.
Therefore, you should sell a share with a potential appreciation of 10% if you have an investment opportunity that offers you 40%, with the objective of maximizing profits.
You should sell the stock when it is no longer undervalued and becomes overvalued, or when it has reached its target price, that is, the intrinsic value and the listing price are the same.
This is the most common cause of sale, when the company no longer offers satisfactory profitability potential, you must sell the shares to find other opportunities in the market.
The company or industry may be exposed to legal, geographic, or industry risks that negatively affect the company's growth prospects.
To hedge the risk of these types of situations, you should sell the stock to buy other undervalued stocks that have less uncertainty and more potential for growth.
This is one of the most important and delicate points because the most common is that you need money when there is a financial crisis, and when you are faced with this type of event, the shares are usually at very low prices. If you sell at this time, it is very likely that you will experience significant losses.
That is why you must invest only the money that you do not need in the medium and long term, and develop an emergency fund that allows you to survive for several months without having to sell any shares.