Looking for stocks to buy can be sometimes fun and satisfying in the best part of the investors’ activities. It can also be quite lucrative, provided they end up buying a stock that increases in price.
To earn a reliable income from investing, you must understand two things well. The first one is the stock’s worth and what other people are willing to pay for it. Only then can you decide whether a specific opportunity is worth pursuing or not.
Is now the best time to buy a stock and invest? Below are five tips to help you identify stocks that have a good chance at making you money.
When a stock goes on sale
Consumers are always looking out for a deal with low prices when it comes to shopping. For instance, low prices during Christmas season always spurs big demands for all products.
However, for some reason, investors do not really get as excited as they nearly do when stocks go on sale. In the stock market, a herd mentality takes over and investors tend to get away from stocks when prices are low.
The end of 2008 and early 2009 were periods of extreme pessimism, but in hindsight, were times of great opportunity for investors, who could have picked up many stocks at beaten-down prices. Last fall was arguably another good buying point and many deals still exist in the market today.
When it hits your buy price
Keep in mind that in investing, it is essential to know a stock’s worth. Then, investors will know whether it is on sale and will probably rise up to this estimated value. Coming to single stock price target is not reasonable, but building up a range at which you would purchase a stock instead.
Analyst reports will suffice to be starting points, as consensus price targets, which are averages of all analyst opinions. Most financial websites publish these figures. Without a price target range, investors would have a hard time to decide when to buy a stock.
When it is undervalued
Having a lot of information is necessary for establishing a price target range, such as if a stock is being undervalued. One of the best ways to find out the level of overvaluation or undervaluation is by estimating a company’s future prospects.
A key valuation technique is a discounted cash flow analysis, which takes a company’s future projected cash flows and discounts them back to the present. The sum of these values is the theoretical price target.Logically, it will probably be a good buy if the current stock price is below that value.
Learn how to evaluate an investment opportunity.
Other valuation techniques include likening a stock’s price to earnings multiples to competitors. Other metrics, including price to sales and price to cash flow, can help an investor out in finding out whether a stock looks cheap compared to its key rivals.
When You Can Patiently Hold It
Let’s assume you have properly identified a stock’s price and have been able to estimate if it is undervalued or not, do not plan on seeing the stock rise in value anytime soon. It can take time for a stock to go up and reach its true value.
Analysts who project prices over the next month, or even next quarter, are simply guessing that the stock will rise in value quickly. It could take a couple years for a stock to get closer to a price target range. It would be even better to consider holding a stock for three to five years, especially if you are confident in its promising growth down the road.
When You Have Done Your Own Homework
Relying on analyst price targets or the advice of newsletters is a good starting point, but great investors do their own homework on a stock. This can consist of reading a company’s annual report, reading its most recent news releases and going online to check out some of its recent presentations to investors or at industry trade shows. All of this data can be easily located at a company’s corporate website under its investor relations page.
Investing in stocks can be exciting, and an intellectual challenge and knowing certain company fundamentals will help you with the stock selection so you know what to buy. Innovative, game-changing companies with big, accelerating earnings and sales growth are the true market leaders you want. That is why legendary stock-picker
Read more about launching into stocks investing.
Peter Lynch recommends that investors buy what they know Others can get to know a company by reading up on it online or talking to other investors. Combined with the above tips, a common-sense strategy to buying a stock can also be the most profitable.
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