Buying and Selling Shares: Tips to Beat the Market

Buying and Selling Shares: Tips to Beat the Market

Buying and selling shares are not a walk in the park. It takes huge amounts of consideration and analysis, not to mention gallons of coffee, or tea if you’re not the coffee guy or gal.

You would think that once you have invested for a while you would be more familiar with market quirks. You would think you’ve already explored all the nooks and crannies of the stock market.

two businessman deciding about buying and selling shares

However, once you’ve embarked on your investing career, you’ll know that there’s more to the market than what meets the eye. These surprises and scenarios make it difficult for a rookie investor—even for old-timers—to decide when to buy or sell stock shares.

Let’s see how you can start doing just that.

Getting Started

You can’t start buying and selling shares if you don’t know how to, well, start buying and selling shares. So let’s first dig deep into how exactly you should do it.

A long time ago, if you wanted to invest in stocks and shares, you would have to meet gentleman who would trade on your behalf. But that was then. Times have changed. And the modern world has one weapon to offset all the unwanted inconvenience of the past.

And that weapon is the internet. The modern internet technology has enabled investors to buy and sell stocks and shares really quickly. Aside from that, you could also spend smaller amounts of money to get started.

That means you just have to have a computer, internet connection, and few bucks to get started. You can find a brokerage online; start trading online; and earn online.

Let’s talk about shares.

Defining Stocks and Shares

When we say “stock,” we refer to a share in the ownership of a company. This means that buying a company’s stocks is also buying a part of the company. You become shareholder of that company.

The most exciting part of buying a stock from the company is that you also have the rights over the business’ earnings.

There are generally two kinds of stocks: the common stocks and the preferred stocks.

Simply put, common stocks are the most common kinds of stocks, hence the name. This makes up the majority of all the stocks found in the stock market. What’s more, being a common stockholder gives your voting rights. This means that you can participate in the decision-making process of the company.

Meanwhile, a preferred stock gives you no voting rights. But it does give you regular dividend payments that do not fluctuate. In addition, in case the company goes out of business, preferred stockholders will receive payments before others.

The Reason behind Stocks

Companies issue stocks because of continuous growth. Oftentimes, the issuance of stocks signals that the company is ready for the next stage of its growth.

The company may try to borrow from banks for the funding of their growth. However, offering its stocks via an initial public offering has more benefits. For one, the company doesn’t have to repay debts or interests.

Stock Exchanges and Indexes

There are a numerous indexes and stock exchanges in the world. These include the Standard & Poor’s 500, which tracks the top 500 US companies, and the FTSE 100, which follows the 100 largest companies in the United Kingdom.

Tips when Buying and Selling Shares

Now, here are some of the important tips you should remember when you are buying and selling shares.

buying shares infographic

Sales

You have to check if the company’s sales are growing. In doing this, check if the growth is related to great performance or is related to temporary events.

This means that you should scrutinize all of the reports and press releases about the company’s earnings. If possible, gather all related reports regarding the company’s performance. Figure out if the company exhibited real growth or not.

It’s generally better to check smaller company with sales ranging from $100 million to $1 billion. These companies should ideally have excess 10 percent yearly. If you’re eyeing bigger companies, their sales should be at 3 percent growth.

In addition, compare the company’s growth both year-over-year and quarterly. If you spot an upward trend quarterly, the company might be a good bet.

Margins

If you see that the sales line is improving, find out if its cost of goods sold line item or its selling, general and administrative expense line on its statement of income soaring at a faster rate.

If so, there’s a possibility that the company is entering a new business. It might also be introducing a new product. It’s also equally possible that the business experiences some headwinds in the growth.

On the flip side, this might also mean that the business doesn’t have any efficient expenses management. This is where earnings reports and management discussion come into the picture again.

Guidance

A huge number of companies provide Wall Street with some kind of future earnings guidance. Check if the company has recently provided more or less future earnings guidance.

Look at the numbers and figures. See if they are higher than the expectations of Wall Street analysts. If so, they can possibly impress analysts and investors alike. If the figures are lower, the future may look dim and may lead to disappointments.

Moreover, earnings guidance may also tell something about market psychology. If a business increases guidance for the current quarter but minimizes expectations, it’s probably going to sell off.

If the company lowers the estimates for the quarter but increases full-year estimates, the stock will likely take off.

In general, always consider the long term. Remember that Wall Street tend to ignore short-term slips if they see potential stellar future.

Buyback Programs

Some companies have repurchasing programs in the open market. They buy back their stocks instead of using the cash to pay dividends or acquire other businesses. Usually, this is a sign that the management thinks the stock is undervalued. Most of the time, companies announce repurchasing programs through press releases.

However, the management may also have other intentions for the program. Some do it to decrease the share count within the public domain. And they do that for better financial ratios or to boost earnings. This makes the company look more appealing to analysts and market participants.

Other do buy-back programs are simply public relations strategy to attract more investors to believe the stock is worth higher than its current market value.

Generally, repurchase programs tell you that better times are in the horizon. It would be better to see the total number of outstanding shares staying the same or falling. This is because future earnings can spread across fewer shares, pushing earnings per share higher.

See also, Dividend Reinvestment Plan: Advantages and Disadvantages

Introduction of New Products

Predicting a new product or service’s performance in the short term is not easy. However, it would be perilously imprudent if you overlook these stocks.

This is because new products can gather a lot of steam from both consumers and investors. This, more often than not, will push share price higher in the near future. Moreover the company has likely spent a fortune for R&D and promotions.

Of course, new products are not infallible to not flop. But if you can jump in early on a good product, you can expect a good pay day.

Tips and tricks written on paper

Wordings and Language

As you read the press release, take note of the words, tone, and implications. In other words, learn how to read between the lines. Remember that such reports are deliberate.

See if the report talks about things like opportunities, potential new products, takeover, and others. These things are generally positive and imply that the company plans to take some actions. And if they do, it means they have the confidence in their stock’s future performance.

Meanwhile, if they talk about the challenges, problems, and issues like these, then it’s better to be suspicious. Check if there are potential catalysts to the stock’s rise.

Most of the time, a positive report is a go signal for you to buy that stock. However, you should still take overly optimistic reports with a grain of salt. You might want to check the company’s previous promises. See if they have failed to deliver them.

Read further: Are You Trading or Gambling?

Technical Analysis

It will also be tremendously helpful if you seek the stock chart for the last couple years. Try to spot seasonal variations in the stock price by using technical analysis. See if it typically trade higher or lower during certain times of the year.

Look at the trend at which the stock is trading in. see if it trades above or below its 50 or 200-day moving averages. Try to know if it trade millions of shares daily.

Go see if the volume has increased or decreased. If the volume decreased, it may be a sign of lower investor interest in the shares. This could mean the decline of the share price. Meanwhile, it the volume increased, it means that the underlying fundamentals are good. This tells you that the company has concrete opportunities for growth.

Consider Fundamental Analysis

Aside from the technical side, you should also look at the fundamentals.

Check the macro trends that might influence the stock. See if the interest rates and taxes are higher. Find the buying patterns that underline or affect, directly or indirectly, the stock. It’s also better to look at other external factors, such as economic or industry downturns.

Conclusion

Buying and selling shares can be a little less stressful once you have a systematic approach to doing them. Tips we have discussed can be a very big help for you to make quick, efficient decisions.

 

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