Buying stocks can be an exciting exercise as well as a rewarding one if the right decision is made to buy particular shares the value of which then rises.
Although the decision of investors – whether experienced or new to the practice – in choosing stock normally depends on a range of factors and even beliefs, they all share a common wisdom – researching investments to ensure they bring high returns.
So with “when is the best time to buy stock?” remaining the golden question, here are some tips to guide investors when making decisions to buy a good value asset.
When stock goes on sale
Some investors rush to sell their stocks when the price falls, while others perceive it as a good opportunity to buy.
Fluctuations in share price are normally attributed to several factors including the company’s stability, political and economic uncertainties, natural disasters and market sentiment, among others.
Therefore, a falling stock price does not always mean it is due to problems related to a company.
For instance, when stock goes on sale, it can be caused by external factors.
Stock going on sale means the price – having already been traded at its intrinsic value on the market – for some reason temporarily drops.
This is viewed as a golden opportunity by those who see the true value and quality of that listed company to purchase the stock at a discounted price because they expect to earn high profits later when the stock rebounds to its intrinsic value.
As legendary investor Warren Buffett once said: “Whether we are talking about socks or stocks, I like buying quality merchandise when it is marked down.”
When stock is undervalued
A number of well-known investors have chosen to invest in undervalued stocks because they firmly believe that the stock price will go up until it again reaches its intrinsic value.
Many methods can be used to determine a stock’s intrinsic value.
The first method is discounted cash flow, where the future projected cash flow of a company will be used to find the present value and then compare it with the market price of stock as to whether it is under- or overvalued.
Investors can also look at a company’s dividend growth, or Gordon Growth Model, which relies on a constant projected dividend growth rate per year.
The price to earnings, or P/E, ratio is another method investors can use – the smaller the result, the better the stock.
When the company’s profits grow
A company’s business operations can strongly affect the market price of its shares – a stock price will keep increasing so long as profits continue to grow.
However, investors should carefully identify a company’s profit growth prospects, whether it is sustainable growth or a one-off price spike that barely impacts the stock price.
Investors should also focus on the company’s outlook on how optimistic the management is towards future revenues and profits, as well as the obstacles that they are likely to face.
A good opportunity emerges when a company secures a large or new project that will add to its revenue stream, and investors are likely to benefit from the resulting capital gains and growth in dividends.
All these corporate developments regarding listed companies are available on the Cambodia Securities Exchange (CSX) website.
When the company conducts a share buy-back
A listed company can decide to buy back its shares when they are viewed as undervalued or when it wishes to increase the firm’s attractiveness by improving the financial ratios that reflect performance.
During repurchasing, the quantity of tradable stocks will shrink leading to an increase in earnings per share.
As a result, the share price is expected to soar in the future due to a spike in demand once the repurchase exercise is completed.
In addition, investors can reap capital gains by reselling the shares to the company as they are likely to be purchased at a premium price.
Nevertheless, investors are advised to conduct thorough research before making an investment decision, which can be done by studying historical stock prices and trading volumes over the previous years allowing investors to determine the right time to purchase or sell stocks.
Studying listed companies’ annual and quarterly financial reports as well as other related press releases issued by them can give investors comprehensive insights regarding their business performance – both short and long term – and the financial health of the company.
Last but not the least, reviewing companies’ analysis reports by industry experts is another good option to gain knowledge of a particular company.
As Warren Buffett once said: “Never invest in a business you cannot understand.”
Source: Investopedia
Contributed by: The Cambodia Securities Exchange, Market Operations Department
Email: [email protected]
Tel: 023 95 88 88 023 95 88 85
Disclaimer: This article has been compiled solely for informative and educational purposes. It is not intended to offer any recommendations or act as investment advice. The Cambodia Securities Exchange is not liable for any losses or damages caused by using it in such a way.