Buying low and selling high

Author: Steven posted in Investing basics tagged with Investing 101, Stock market

When it comes to buying stocks, the goal is to buy low and sell high. Unfortunately, since none of us have a crystal ball to know what lies ahead, this is not as easy as it seems despite the internet providing a wealth of information to help you evaluate stocks. Always take free advice with a grain of salt and complete your own analysis of a company before you buy its stock.

So what drives the price of stocks up and down? In general, when more people willing to buy a stock than to sell it, the stock price rises. Conversely, when more people willing to sell a stock than to buy it, the stock prices drops. Since most investors buy shares in stock based on their estimate of how the company will perform in the future and they do not have a perfect crystal ball, the share price of a company does not necessarily reflect how a company is currently performing. In summary, the price of a stock is deeply influenced by opinions by all the investors in the market and does not necessarily reflect the intrinsic value of the stock. From this we may deduce that a company’s share price can be overvalued if people think the company is worth more than it actually is or the share price can be undervalued if people think it is worth less than it actually is. If you are searching for an undervalued stock you must do your research to make this determination. You might determine that a stock is undervalued and then find out later that you actually ended up paying too much for it. If you think you are the only investor that faces this issue, think again.

If you are a fan of technical analysis share price movements are a very important parameter to you when deciding to buy or sell a stock. Support and resistance lines are commonly used by traders who use technical analysis to guide their investing decisions. If you are an investor who believes in fundamental stock analysis then your will use other research to determine if a stock is a good buy at the current price or not. Burton G. Malkiel in “A Random Walk Down Wall Street” provides a in­-depth analysis of the fundamental determinants of stock prices which include the expected growth rate, the expected dividend payout, the degree of risk, and the level of market interests rates. Factors that would tend to result in a higher stock valuation include a high growth rate with a long expected duration, a high and growing dividend payout, a lower risk company and lower interest rates.

This sounds straightforward but it is important to remember that estimating the growth rate and duration of dividend growth is not an easy or precise process. Although the stock market follows certain fundamentals, stock prices are volatile because they are bought on expectations not only on facts.

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