No matter how long you’ve been involved in the stock market, there’s always one question in the back of your mind “When should I buy or sell stocks?”. This is especially true if you’re new to the market. Nevertheless, it’s still something that you should be asking yourself, as you’re risking your hard-earned money. With the right knowledge, you will be able to identify whether you’re sitting on a profit or loss. So, without further ado, here are some things to consider before buying or selling your stocks:
Let’s begin with four factors around why and when you should sell a stock:
The purpose of buying has changed
It’s always vital to have a reason when you buy shares of a certain company. For instance, suppose you were amongst numerous people who bought shares of a major bank because you had faith in the financial expertise of its CEO. Once he or she steps down, it means that the reason for your investment no longer exists. It does not mean that the bank will fail or that the share prices are going to drop. However, since your investment was based on that particular factor, it’s best to sell your shares. Always jot down the reason(s) why you’re investing somewhere and make sure you exit when it no longer exists.
Industry Disruption
This could mean that the industry where the company operates is going through structural changes such as regulatory reforms or a complete revamp. For example, a few years ago, the DTH industry was flourishing. People were rushing to buy set-top-boxes and other dish connections. Even the government promoted this move! However, OTT platforms swooped in and stole the market in a flash. In what seemed like an overnight change, the DTH industry came to a near-grinding halt. For this reason, it’s important to keep an eye on future technologies that could impact the industry where you have invested. No matter how well the industry did in the past, it’s crucial to look to the future and change your position if there are underlying threats.
Limited Capital
It doesn’t matter whether you’re a working person or a billionaire, everyone has a capital limit. So, if you’ve invested all your capital in the shares of a certain company but spot a better investment opportunity, you should sell your previous shares and invest in the one that’s likely to do better.
Fundamentals
This is obviously the most important reason. Say you bought shares in a company that had a steady cash flow and low debt. However, lately, the company has begun to gain a bad rep by plunging into debt, or promoters distance themselves from it, shares get pledged, etc. It’s best to sell your shares immediately.
It doesn’t make sense to sell shares when the price has risen a lot. If you’re looking to become a great investor or generate wealth through the share market, you should look at shares that give you a return of at least 10 times the investment. So, before selling off a share when it’s high, wait a little while and give the company a chance if you have faith in it.
Now, let’s look at the best time to buy stocks:
Avoid stocks in high-demand
To put it in simple words, you must remember that ‘there is never a good time to buy bad stocks’. Rather than knowing when to buy a stock, it’s better to know when not to buy it. For instance, you find a certain stock that’s got the media in a frenzy because it’s hitting the 52-week high mark every day. Even though people are buying massive shares of this stock, the hype will die down and it will return to its intrinsic value. This means that you will lose a chunk of capital if you invest during the hype. There are chances that you might even not be able to draw your investment as the stock is likely to keep hitting lower circuits till then.
It’s best to avoid extremely popular shares that receive media coverage. If it does not plunge, it might even have reached a high point and remain stagnant, making you a little late to the table.
The capital allocation cycle is complete
For example, there’s a company that has done extremely well over the past five years and has accumulated reserves that total INR 5000 crores. Then the company decides to open a new manufacturing plant that will cost it INR 7500 crores. However, it’s not yet open for business. On paper, it will seem like a company that had such a massive reserve is now INR 2500 crores in debt and is not generating much income. It may cause you to reject the company. However, you must realize that as the new unit commences operations, there is going to be a double portion of sales. And, once that happens, the share prices could also double and it will be too late for you to make a profit.
Industry growth
You must look to see if there is any possibility for growth in the industry you invest in. You must think years down the line and gauge whether the industry will continue to grow or become stagnant. For example, ask yourself if people are still going to use laptops five years down the line, and if your answer is yes, you should invest in that industry.
So, there you have it, the foundational principles of when to buy and sell shares. All it takes is time dedicated to a little background research and you’re good to go!