When to buy (or sell) a stock
Trading stocks consists of two simple components: buying and selling.
That’s the what.
The how is equally easy: with a few clicks on your broker’s website or mobile app, you can complete trades in a matter of seconds.
It’s the when that makes the process tricky. After all, profitable trades are totally dependent on timing.
In other words, you need to know when to get in and when to get out.
So, when should you buy (or sell) a stock? Though there’s no one-size-fits-all approach, buying and selling always requires a combination of patience, research, and luck.
Fortunately, while no investor has perfect information, there are a few helpful approaches to consider before you decide to make a trade.
It all starts with identifying the right “entry point.”
Entry Points: Explained
The financial world is replete with opinions on what to buy and when to buy it. A quick Google search will yield literally billions of differing opinions on the matter.
And yet, despite the conjecture, no one’s holding a crystal ball and everyone’s guessing.
While loud speculators and clamoring commentators compete for attention, investors nonetheless remain tasked with one job: to assess the available information and make the most informed decision possible.
This due diligence process can include reviewing analysts’ price targets, reading a company’s annual reports, studying their recent press releases, or simply viewing their online presentations and webinars.
As an investor, you’re always responsible for setting your own curriculum and assigning your own homework.
When you like what you see, it’s time to get serious about buying.
The moment you buy a stock, you officially enter into a position. This is also known as the “entry point,” or the initial price at which you bought the security.
These metrics can be invaluable in helping investors decide when to get in (and when to get out).
To Buy (or Not to Buy)
Successful investors exercise discipline.
To maximize returns and to limit losses, they determine their entry (and exit) points well in advance of entering a new position.
Though it’s true that no one can predict market movements, it’s also true that investors can benefit from developing a game plan before investing their money.
While passive investors adhere to their long-term “buy and hold” strategies, active traders must be more nimble. To estimate a stock’s potential returns, they first have to understand its past.
After all, price movement is information.
To get a snapshot of where a given stock is trending, start by looking at its recent share price history. If it indicates momentum with continued upside potential, it may signal a prime entry point.
You can also look at a stock’s moving average (MA), which shows the average value of a stock over a specified period of time (i.e. over 10 days, 50 days, or 200 days).
When a stock outperforms its MA, consider waiting for a pullback before buying. In other words, let it return to the line of its moving average (or even dip below it).
For the sake of example, let’s imagine an investor who’s focused on owning shares of Microsoft (MSFT).
He’s not only intrigued by the company’s cloud division and command of the gaming industry, but he has also observed Microsoft’s dramatic price increase and decline in recent months (i.e. its rising and falling MA).
Despite the investor’s enthusiasm, he refrains from buying MSFT stock unless its share price drops to $200. With his entry point firmly established, he then sets his exit point at $300, where he would generate a 50% profit if he decided to sell (assuming he jumped in at $200 per share).
In short, this investor practices the classic “buy low, sell high” approach.
By developing an entry point strategy, he chooses patience over impulse and insulates himself from emotions.
When to Sell
There can be a multitude of reasons to sell a stock.
Maybe your stock has hit its predetermined exit target. Maybe it dropped to your stop loss target. Maybe you need additional income.
Or maybe you simply need to rebalance your portfolio.
While you know what you need better than anyone, here’s something to keep in mind: if you don’t set your exit points before you buy the stock, you’ll expose yourself to the vicissitudes of both the market and your emotions.
As human beings, we’re nothing if not mercurial, and we need to guard against knee-jerk reactions — especially when it comes to investing.
Then again, it’s also possible that your investment thesis will evolve over time. If your reason for buying a stock changes, and you believe it’s the right time to sell, take the next exit and get out while you’re up.
It all comes down to timing — knowing when to buy, when to hold, and when to sell.
After all, timing is everything.
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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.
