How to Know When to Buy Shares of Stock
Nobody can time the market perfectly, but knowing which stocks to buy and when to buy them can make the difference between making and losing money. Markets react to news everyday, sometimes irrationally. Stocks of well-managed companies sometimes fall during these periods of market volatility. If you are a patient investor and can tolerate some market turbulence, these are the times to look for bargains. Think of the process as searching for bargains in the weekly fliers and buying quality brands at a discount.
Other People Are Reading
Instructions
-
-
1
Prepare a list of stocks to follow. Famed investor and chairman of Berkshire Hathaway, Warren Buffett, has suggested often that he buys stocks in companies he understands. Do not include more than two dozen stocks in your list because you might not have adequate time for research.
-
2
Research the fundamentals of the stocks in your list on a continual basis. Review the information on their investor relations websites and sign up for corporate press releases. Scan other sources of financial information, including The Wall Street Journal, Bloomberg and MSN Money.
-
-
3
Prioritize the stocks in your list. Bloomberg reporter Andrew Frye quoted Buffett as saying that extraordinary businesses do not require good management because they have pricing power. However, other market analysts believe that long-term success requires good management. Look at the long-term earnings record to rank the stocks in your list.
-
4
Track the earnings releases of the companies in your list. Public companies report quarterly and annual financial statements to shareholders and regulatory authorities. The NASDAQ Dozen, a list of 12 indicators for buying stocks prepared by the NASDAQ stock exchange, suggests giving a passing score to companies that consistently surprise the market with earnings results and forecasts that are stronger than the market consensus. Consider buying companies with a reliable earnings stream, especially if a recent market downturn has depressed their stock prices.
-
5
Analyze insider buying and selling. Insiders include senior executives and board members. Look for turning points -- for example, if a stock on your list has been languishing but insider buying has recently picked up, this could be a positive turning point and a buy signal.
-
6
Use economic indicators. New York University professor Aswath Damodaran suggests there is an intuitive link between the business cycle and stock prices. However, as it is difficult to pinpoint economic inflection points, many investors take advantage of depressed prices during a recession to buy quality stocks with good long-term fundamentals.
-
7
Use technical analysis, which is using historical price data to predict future prices. For example, if a stock that has been trading in a narrow price range suddenly establishes new highs on heavy trading volume, it could be a buy signal. Review recent press releases and media coverage to understand the reasons before placing a buy order. For example, do not buy the stock if takeover speculation is fueling the price increases. However, if there has been a new contract award or a successful product launch, look for opportunities to accumulate the stock.
-
1
