When I asked my clients what their biggest challenge is when it comes to investing, many answered that they did not know when to buy a stock and when to eventually sell it!
As an inexperienced investor, you are probably asking yourself the same question. To help you out, I decided to share with you my strategy when it comes to buying and selling stocks.
Ready, set, read!
WHEN DO YOU BUY STOCKS?
The investment strategy I follow is the strategy of giants like Warren Buffett and is called Value investing.
This strategy involves buying stocks that meet the following broad criteria:
1.The underlying company is great
What makes a company “great” is not determined by how many times news websites write about it, but it is mainly determined by the company’s financial results.
Make sure to look for:
- Consistently high profitability
- Low debt levels
- Ability to pay its short-term obligations
2.How much the stock is valued?
You can tell if a stock is cheap only by looking at the stock price alone. However, you also need to compare this price to the value of the company. In the world of investing, we called it ‘’intrinsic value’’.
And here comes the catch: “How do I calculate the intrinsic value of a company?’’
Luckily, we have the right video that explains the concept:
To sum up, only buy a stock when it’s of a great company whose current stock price is at least 25% lower than its intrinsic value.
WHEN DO YOU SELL STOCKS?
There are three main reasons to sell a stock:
- Price reaches the value. When it comes to selling, you should sell stocks when their price gets close to their intrinsic value. Holding on to stocks that increase in price beyond their value is simply gambling, and you should avoid it.
- Long-term problems arise. When you bought a stock, the company may have been doing great at the time of purchase, but over time problems can arise. Look out for that and re-evaluate your position. However, only sell if the company is experiencing long-term problems, like regulation that hinders a company’s business model.
- A better opportunity becomes available. Always put your money where it will earn the highest possible return. If your money is currently invested in an ‘’average’’ business with not as good potential, and a better opportunity arises, sell and reinvest.