Buy. Sell. Hold. Buying and selling stocks can sound exciting, complicated, and confusing all at once. But it doesn’t have to be. The first step to understanding when to buy and sell stocks is knowing how a stock market or stock exchange works.
The first thing to know: There isn’t just one stock market—there are many stock exchanges and markets worldwide through which people buy and sell stocks or shares of a company.
Stock markets or exchanges consist of lots of people buying and selling at different prices because they all have different ideas about those stocks’ value. One investor might think a stock will go up, while another thinks it will go down. So who’s right about when to buy stocks?
Understanding When to Buy and Sell Stocks
The fundamentals of when to buy and sell a stock come down to the basics of how a stock market works. The idea is to buy low and sell high: If you buy a stock for $1 and sell it for $2, you’ve made a profit.
In the short term, any given stock could go up or down on any given day for various reasons. Perhaps the fundamental business behind the stock is terrible, and the company will lose money. Or the stock price could change because of a report from an analyst, a rumor about coming business actions, or general economic news.
Because of all that volatility, it can be risky for individual investors to buy and sell stocks to make a profit. Many investors prefer investments like ETFs, index funds, or mutual funds, which contain many stocks in one neat package.
Keep in mind past performance is no guarantee of future results. For example, in 2018, the S&P 500 saw a -6.24% return; in 2019, it saw a 28.88% return.
It can be hard to know when to buy and sell stocks, even for professionals. Money managers try to beat the market by actively buying and selling stocks instead of investing in funds—but, in 2019, only 29% of U.S. stock fund managers beat their benchmark.
Even if a passively managed index fund might be a better long-term investment, there are still many reasons people want to trade stocks: because they enjoy it and want to take a more active role in their financial goals. After all, they want to make specific choices with their investments (like investing in socially conscious businesses or businesses they support).
For individuals looking to start investing, there are certain concepts to know: diversify, start small, focus on overall investing, and have long-term goals. Most importantly, one needs to know when to buy and sell.
When Can I Buy Stocks?
The trading hours (i.e., when you can buy stocks) for popular exchanges and assets are as follows:
• New York Stock Exchange (NYSE): 9:30 a.m. to 4:30 p.m., Monday through Friday {EST}
• NASDAQ: 9:30 a.m. to 4:30 p.m., Monday through Friday
• Cryptocurrency markets: Open 24/7
Recommended: How to Buy Fractional Shares
How Do You Know When to Buy a Stock
When an investor has done their research and feels confident that a stock price will rise in the short or long term and that they’re willing to hold onto it until it does, that’s the right time to buy a stock.
It helps to be informed when considering whether to buy stocks, and one way to do that is to learn about the company itself. Interested investors can find many companies’ financial and earnings reports from the SEC in their EDGAR database.
While ultimately, it can be a good idea to buy stocks across different industries to diversify, it sometimes helps to start with a business or industry with which one is familiar. Knowing about the company can help put the earnings reports into context.
Understanding the value of stocks is always tied to understanding the business those stocks represent a share. Is the company a good investment? Does it have sound financials and growth potential? Here are helpful questions to consider when contemplating buying a stock:
What is the price range at which you’re willing to buy? If an investor has a company in mind, setting a price range at which they would want to buy stock in that company may help inform their decision. One can do this through analysts’ reports and consensus price targets, which average all analyst opinions.
Does the stock appear undervalued? There are different ways to determine value. The most common valuation metric is a price-earnings ratio (or P/E), which takes the price per share and divides it by earnings per share. The lower the number, the less the value. Generally, for U.S. companies, a P/E below 15 is considered a good value, and a P/E over 20 is considered a wrong value. You can also compare the company’s P/E to others in the industry.
Another way to look at value is a discounted cash flow (DCF) analysis, which takes projected cash values and discounts them back to the present. This ultimately gives an investor a theoretical price target; if the actual price is below the target, it’s undervalued and a good buy.
Does the stock offer dividends? A stock that distributes profits in dividends to shareholders isn’t necessarily a better investment, but dividends have played a notable role in investor returns during the past 50 years. This goes back to 1978, when 78% of the total S&P 500 Index returns. PDF files were attributed to dividend reinvestment and compounding interest.
The key is to stay informed and make investing decisions based on sound research. It can be tempting to follow the trendy stock, but sometimes it’s more hype than it is worth.
