A broker is frequently forced to make a split-second decision about whether to buy, sell, or hold a stock. There isn’t time to consult stock analysts, interview executives, or read lengthy research reports. A quick glance at some key information, on the other hand, can lead to a good decision made under duress. Assume a company has just issued a press release regarding its quarterly report. Skip the filler and look for some of these important facts.
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Back to what you came here for, here are the tips on knowing when to buy, hold, or sell stock.
Top Tips on Knowing When to Buy, Hold or Sell Stocks
Check to see if the company’s sales are increasing and, if so, whether the increase is sustainable or due to a one-time event.
In addition to checking the sales figures, you’ll need to read the entire press release to see what management had to say about the quarter. The numbers, combined with the comments, can reveal whether the company experienced growth or simply received a windfall.
In general, smaller companies with sales of $100 million to $1 billion should grow at a rate of around 10% per year. Larger companies should be growing at least 3% per year to be considered.
Finally, compare a company’s sales growth not only from last year but also from the previous quarter. If quarterly sales increased, it’s usually another good sign.
In the absence of more in-depth research options, an investor can learn a lot about a company’s worth and whether its stock is worth purchasing by reading press releases and quarterly profit reports.
Increasing Profit Margin
The margins of a company generally improve or deteriorate depending on how well it is managed. Something is wrong if the sales line is increasing while costs are increasing at a faster rate.
It’s not always bad news. It’s possible that the company is venturing into a new market, launching a new product, or expanding its footprint. For years, Amazon, for example, infuriated investors by investing heavily in warehouses from coast to coast. That infrastructure spending has finally begun to pay off.
On the other hand, it could indicate that the company is simply not managing its expenses well. The discussion of the quarterly results by management can aid in assessing the situation.
What Are The Companies Saying?
Many companies provide Wall Street with guidance on future earnings, and it is almost always important. It’s also important to see how “the Street” reacts to the news.
That is, the company’s guidance for the coming quarter could be better or worse than what Wall Street analysts expect. And, at least in the short term, those expectations will move the stock price up or down.
To delve a little deeper into the psychology of earnings guidance, if a company raises its guidance for the current quarter while downplaying expectations beyond that, the stock is likely to fall. If a company lowers its forecast for the current quarter but raises its forecast for the full year, the stock is likely to rise. As a general rule, keep the long term in mind. Most of the time, Wall Street will overlook a short-term hiccup if it believes that an upward catalyst is on the horizon.
Stock Buyback Programs
When a company uses its cash to repurchase its own stock, it is usually a sign that management believes the stock is undervalued. The company’s press release will almost certainly mention buyback programs.
However, management may have other motivations. It may wish to reduce the total number of publicly traded shares in order to improve financial ratios or boost earnings, making the company more appealing to the analyst community. It could be a public relations ploy to persuade investors that the stock is worth more. Share repurchase programs should be a sign that the company’s fortunes are improving.
In general, you want to see the total number of outstanding shares remain constant or decrease, possibly as a result of a share repurchase program. This means that future earnings will be spread across fewer shares, resulting in higher earnings per share. As the number of shares outstanding grows, earnings are distributed to a larger pool of investors and diluted, reducing your profit potential.
It’s nearly impossible to predict whether a new product will be a success or a flop. It’s a big mistake, however, to ignore the stocks of the companies that make them. Consumers and investors frequently pay the most attention to new products. This frequently contributes to a rise in the share price in the short term. And, as it positions itself to make a lot of money, the company has probably spent a lot of money on R&D and promotions.
Consider Apple’s introduction of the iPod in 2001. Initially, some investors and analysts were skeptical that the device would generate significant revenue for the company. That device, as it turned out, fast tracked Apple’s growth throughout the decade.
Of course, new products do not always turn out to be cash cows for the companies that create them, but if you get in on a good one early, the potential for profit is enormous.
Tone of the Language Used
Consider your impression of what happened in the quarter as you read the press release. Management may have extolled the company’s numerous “opportunities” and reveled in its past success. Alternatively, it could have listed the numerous “challenges” that the company faces. Management may identify potential business catalysts, such as new products or acquisition candidates.
In any case, the language used can be just as important as the earnings guidance figures. The language used in these press releases is purposeful. Many people in the public relations and legal departments look over it. An upbeat report is especially encouraging, whereas a report with muted language should be treated with caution.
Reports that are overly optimistic should also be viewed with caution. If a company fails to deliver on previous promises or falls short of future expectations, the stock is likely to suffer, regardless of what management says.
Indicators of Technical Performance
Finally, examine the stock chart for the previous year and the previous five years. Is the stock price subject to seasonal fluctuations? It may trade higher or lower on a regular basis during certain seasons.
Determine the trend in which this stock is trading: Is the stock trading higher or lower than its 50-day and 200-day moving averages? Is it a thinly traded stock, or do millions of shares change hands every day? Is the volume increasing or decreasing recently? A decrease in volume could indicate less interest in the shares, which could lead to a drop in the share price. Increases are generally favorable if the underlying fundamentals are strong, indicating that the company has solid growth prospects and is well-capitalized.
Taking a 10,000-foot view of a company allows you to consider the external factors that could prevent the stock from thriving.
The 10,000 Foot Perspective
Consider the macro trends that may have an impact on the stock in addition to the press release. Rising interest rates, higher taxes, or changes in consumer behavior could all have an effect on the stock. Other external factors, such as an industry-wide downturn, could also have an impact on the company. These factors can be just as important as fundamentals and technical indicators.
Consider the case of Continental Airlines in 2006. The company appeared to be in good shape, but higher fuel costs and a number of bankruptcies in the airline industry appeared to be weighing on the stock. Continental expected to significantly increase its earnings over the next year, but the sector outlook appeared bleak. In 2010, Continental Airlines merged with United Airlines.
Investors and their brokers are frequently forced to analyze companies on the fly and make split-second decisions to buy, sell, or hold. By focusing on the most important information, they can avoid making rash decisions.
Of course, if you want to trade or invest, you’ll need a broker. If you don’t already have one and are debating which broker to use, conduct some research to find a broker who will meet your needs.