How to Buy: check for cushion in earnings to eliminate risk that a fall in earnings could erase dividend. Buy when yield is attractive relative to stock's' history.
When to Sell: Fundamentals start to deteriorate (losing market share, adding too much debt, acquisition of unrelated business, no research and development or share price has appreciated 30 to 50 percent and yield becomes unattractive)
It seems like there is some confusion about this. Some people might be shocked when they see a stock fall on great earnings, or vice versa.
That is because stock prices are not directly linked to the company's profit. If a company makes a 20% return on their capital it does not mean that the stock will also go up 20%.
The points to consider while buying stocks is that what actually does move a stock's price is something called supply and demand. If more people want to buy the stock then sell it then the stock will go up. If more people want to sell the stock then buy it then the price will go down.
That is why stocks move faster when they fall then they do when they go up. It is easier for someone to panic and pull their money out of the market then it is for them to jump into a position. Think of how fast you would get out of something if you where scared it could harm you.
The stock market is largely an emotional machine making decisions not always by logic, but by fear and greed.
This is good news for the trader because it means that you do not have to know everything there is to know about a company in order to make a profit. Instead you can be able to estimate what could happen in the near future by observing price patterns and apply contrarian analysis to your investments.
In a continuous bearish situation of the market, investors should build their tent on good companies, whether they are growth, value or dividend paying companies. This is because they are the best stocks to hold in one's portfolio. Stock of such companies could be affected as a result of the down market and panic selling by irrational investors. Such companies may have posted impressive earnings but the market is responding to it due to bearish tend in the market. However the financial strength of the companies remains stable. Most of them would even continue to grow and develop. As time passes and the bearish period ends, the stock price would quickly catch the intrinsic value of the company and the price would go up and that is one way to make money in shares.
During a bearish market, equities reflect their real value when compared with their price earnings. This suggests that the market creates opportunities for investors to buy stock at the cheapest price and make money.
There are stocks which are traded at discount to their fair value even before the bearish market. It is possible that some of these stocks will still lose additional value; chances are that many of them would yield a positive return even in unstable market.
For instance, many stocks sell at relatively low price when compared with the last public offering price and what they sold when the market was bullish. At a time like this, investors should take position as equity prices becomes cheaper, though more risky.
History repeats itself in the stock market and by trading it you can attempt to understand it and profit as other people make the same mistakes over and over again. So remain the above key concepts in portfolio building for optimal investing results.
