You want to start buying and selling stocks, but it sounds kind of complicated. 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.
First: there isn’t just one stock market—there are many stock exchanges and markets around the world. A stock is simply a share of a company, which can be bought or sold.
Stock markets or exchanges are comprised of lots of people buying and selling at different prices, because they all have different ideas about the value of those stocks. You might think a stock is going to go up, while another investor thinks it’s going to 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 stocks comes down to the basics of how a stock market works. If you buy a stock for $1 and sell it for $2, then you’ve made a profit.
Of course, there are lots of people selling at lots of prices, all trying to make a profit. That’s why the New York Stock Exchange averages over $30 billion worth of trades every day. You want to buy low and sell high—but so does everyone else.
How do you know if you’re getting a good price for your stock?
In the short-term, any given stock could go up or down on any given day. That could be because the fundamental business behind the stock is bad and the company is going to lose money. Or it could simply be because of a report from an analyst, a rumor about coming business actions, or even overall economic news.
In general, because of all that volatility, it can be risky for individual investors to buy and sell stocks to make a profit, so many investors prefer investments like ETFs, index funds, or mutual funds, which contain many stocks in one neat package.
Historically, the S&P 500 , a long-standing index fund, has seen a 6.8% average return in the last 30 years. Keep in mind, past performance is no guarantee of future results. When money managers try to beat the market by actively buying and selling stocks instead of investing in funds, 95% of them fail .
It can be hard to know when to buy and sell stocks, even for professionals. But even if a passively managed index fund might be a better long-term investment, there are still lots of reasons people want to trade stocks—because they enjoy it, because they want to take a more active role in their financial goals, because they want to make specific choices with their investments (like investing in socially conscious businesses or in businesses they support).
If you’re going to get started investing, then there are some concepts you may want to know about when investing in today’s market—diversify, start small, focus on overall investing, and have long-term goals. If you do want to buy and sell stocks, then you should know when to buy and sell.
Buying a Stock
In order to truly know when to buy stocks, you may want to learn about the business you’re buying the stock in. You can find many company’s financial reports and earnings reports on the SEC website . The key is to do your homework.
You may consider starting with a business or industry you are familiar with. Understanding the value of stocks is always tied to understanding the business those stocks represent a share in. Is the company a good investment? Does it have sound financials and growth potential?
Certainly, simply knowing you like a company isn’t the same as knowing you should buy a share in that company. But knowing about the company can help put the earnings reports into context. (Ultimately, it can be a good idea to buy stocks across different industries in order to diversify.)
One way to know when to buy a stock is to set a price or price range for the stock. If you have your eye on a company, setting a price range at which you would want to buy stock in that company may help inform your decision. You can do this through analysts’ reports and consensus price targets, which average all analyst opinions.
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A good strategy can be to buy a stock when you believe it’s undervalued. That can mean buying a stock when it’s cheap—though cheap isn’t always good, it depends on the business and its growth potential. 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 cheap and a P/E over 20 is considered expensive. 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 analysis, which takes projected cash values and discounts them back to the present. This ultimately gives you a theoretical price target and if the actual price is below the target, then it’s (in theory) undervalued and a good buy.
There are lots of other things to consider about which stocks to buy—all of which come down to the financial health of the company you’re buying into. One important question is if the stock chooses to distribute profits in the form of dividends to shareholders.
A stock that pays dividends isn’t necessarily a better investment, but dividends have accounted for 44% of the returns over the last 80 years of the S&P 500—and then you can reinvest those dividends into even more shares and hopefully make more money. (You can also keep the dividend payments—though there is no other return potential when you do.)
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.
The rules about when to sell stocks are almost the opposite of the rules about when to buy stocks. In general, though, if you buy a stock, you’re going to want to hold onto it for awhile. Most people who “day trade” or try to make trades up and down every day, lose money.
If you’re buying a stock because it’s undervalued, then it could take a few years for it to reach its correct valuation. There’s always a risk it never reaches what you’ve determined is the correct valuation. Just like you can set a price range about when you want to buy a stock, you can also set a price range for when you want to sell. And you should continue to do your homework. When the valuation no longer justifies the price, it may just be time to sell.
Some red flags to look out for when buying and selling stocks—companies that have stopped earning profits, companies under investigation, companies with lots of debt relative to their industry, and companies which have cut their dividend.
Another important thing to know before you get started buying and selling stocks is your risk tolerance. If you’re going to panic and want to sell every time your stock price goes down, even when it might be smart to wait it out, then you could end up losing money. Know how patient you’re willing to be and how tolerant of risk you are.
There is one rule of thumb that’s just popular wisdom—the stock market reaches a high point in May or June and then goes down over the summer until September or October. While that can sometimes be observed in overall market behavior, partially because traders (just like lots of people) go on vacation in the summer and partially because it’s a bit of a self-fulfilling prophecy, it doesn’t mean an individual stock is going to go down over the summer. Taking this advice—and other folk lore-based advice like this‚ with a grain of salt.
Getting Professional Help Buying and Selling
Now that you know more about buying and selling stock, how do you buy stocks? You don’t just show up on the floor of the stock exchange!
These days, one of the easiest ways to buy and sell stocks, or manage any kind of investment portfolio, is to open an online brokerage account. This allows you to pick specific stocks you want to buy or sell. You then typically pay fees based on the account and the number of trades you make. Another option is to open a wealth management account and have more guidance in your financial strategy.
For example, when you open a SoFi Invest® account, you’ll have access to SoFi financial planners who can give you advice for your specific financial goals. They can help determine your risk tolerance, investing goals, and diversifying your portfolio.
Choose how you want to invest.
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Investing comes with risk, including the risk of loss.
This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
The information provided is not meant to provide investment, tax or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory and automated services offered through SoFi Wealth LLC. An SEC registered investment advisor. SoFi Securities LLC, member FINRA / SIPC .