Shares Guides

How to Know when to Buy Shares

Knowing when to buy shares is key to a profit, buying into an IPO, buying undervalued shares or analysing Director Dealings can all help in the process. Avoid buying at a peak to avoid a hard fall.

Avoid Buying at a Peak – Look for Unjustified Crashes in Price

Buying at the peak of anything means that the risk of a fall in value is greater. Using ratios such as the P/E Ratio can help you to gain a view if company is overvalued or undervalued. The trick is being able to anticipate the peak – and that comes from doing your homework in advance. If you’re looking for income, other ratios such as the Dividend Yield can give you good indications as to whether the case for a buy is strong.

The markets also tend to dislike bad news and dislike it fairly hard – usually there is a strong negative reaction which could present an opportunity to buy. Likewise, wider macro factors which spook investors could also present an opportunity to buy at a discounted value – so long as the shares you are buying are resilient to the wider challenges.

Avoid Buying just Because Someone Says So

Just because a newspaper columnist has a share tip or someone who works for a reputable firm has an opinion on a good share to buy, it doesn’t mean it is a good idea. Even the very best get it wrong and they get it wrong regularly. You must have conviction in your own choice.

Buying into an IPO

One of the first entry points to buy a share in a company is during an Initial Public Offering, this is the first time a private company will offer shares in its company to outside investors in return for capital. Many Online Brokers will allow you to participate in IPOs, however sometimes they become oversubscribed and you can’t invest as much as you’d like.

IPOs are popular because they can be a sign to you that a company is preparing aggressive growth. Likewise, there is consensus is that shares of a company are normally priced below their true value – this is to attract investment, hence why you will commonly hear (but not always) about a company’s share price soaring on its stock market debut.

Monitor Director Dealings

In websites and newspapers you will often note ‘Director Dealings’ – these are declarations that Directors of a particular company have purchased shares. The logic here is that Directors buying shares in the company they work for means they have faith in its performance.

Buys from a CFO or CEO are usually watched closely as out of all the Directors of a firm, it is expected that these have the most knowledge of how a business performs.

However, Director Dealings can also be a red herring. Directors may be purchasing shares in order to boost confidence in the shares or just as a matter of course, newcomers will traditionally conduct Director Deals as a show of good faith in the company.

Monitor Broker Consensus and Target Prices

Equity analysts working for Brokers and Investment Banks will conduct details analysis on shares and either tag them with a buy, hold or sell rating. Monitoring the average consensus from these ratings and average ‘target price’ (price they think it will achieve) could give clues as to whether a share could be a good buy.

Whatever you Buy, have Confidence

Out of all the approaches you may use when buying shares, the fundamental principle is to have confidence in why you bought it (this includes the timescale for holding it – preferably long-term if investing rather than trading). It is too easy to get wrapped up in broker views, positive company out looks but ultimately you must have conviction in your decision.

Without knowing why you bought a share in the first place also makes it easier to understand when to sell it because you will understand if it’s no longer a true reflection of what you’d expected.

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