Buying, selling, or holding a stock often requires a broker to make a quick decision. There is no time to contact stock analysts, conduct management interviews, or read long research studies. A fast peek at some crucial facts, on the other hand, can lead to a sound judgment made under duress.
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| When to Buy, Sell, or Hold Stock: How the Experts Make Their Decisions |
Assume a corporation has just issued a press release regarding its quarterly report. Skip the fluff and search for some of this important information.
Sales Growth
Examine if the company's revenues are increasing and, if so, whether the increase is sustainable or due to a one-time incident. You'll need to read the complete press release in order to discover what management had to say about the quarter in addition to the sales figures. You can determine if the firm experienced growth or just received a windfall from the figures and the remarks.
Smaller companies with sales of $100 million to $1 billion should grow at a 10% annual rate. To be of interest, larger enterprises should be expanding by at least 3% each year.
Finally, evaluate a company's sales increase not only from last year but also from the previous quarter. If quarterly sales increase, it's typically another encouraging indicator.
Increasing Profitability
The margins of a firm typically grow or decrease depending on how effectively it is managed. Something is wrong if sales are increasing but expenditures are increasing quickly.
Not all of the news is negative. It is possible that the firm is venturing into a new industry, releasing a new product, or extending its reach. For years, Amazon, for example, irritated investors by spending extensively on warehouses from coast to coast. ultimately began to show a return on that infrastructural investment.
On the contrary hand, it can just be a sign that the business isn't managing its spending well. A situational assessment can be made by listening to the management's discussion of the quarterly results.
The Direction
It's almost always crucial that corporations provide Wall Street with some kind of guidance regarding potential profitability in the future. It's also vital to see how "the Street" reacts to the news. In other words, the company's forecast for the upcoming quarter might be better or worse than what Wall Street experts had predicted. And those expectations will influence the stock price, at least in the short run.
To go a little deeper into the psychology of profit guidance, if a firm boosts its forecast for the current quarter while downplaying expectations beyond that, the stock is likely to fall. If a firm lowers its forecast for the current quarter but boosts its forecast for the entire year, the stock is likely to rise.
Keep an eye on the long term as a general rule. Most of the time, Wall Street will ignore a short-term hiccup if it believes an upward catalyst is on the way.
Programs for Stock Buybacks
It's often a positive indication that management thinks the stock is cheap when a firm utilizes its cash to repurchase its own stock. The firm news release will almost certainly include repurchase schemes.
However, management may have different motivations. It may wish to cut the total number of publicly traded shares in order to enhance financial ratios or raise profitability, making the firm more appealing to the analyst community. It might be a public relations strategy to make investors believe the stock is more valuable.
Programs for buying back shares of stock ought to indicate that the firm will soon experience better times.
In general, you want to see the total number of outstanding shares remain constant or decrease, maybe as a consequence 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 bigger pool of investors and diluted, reducing your profit potential.
Brand-New Items
A new product's likelihood of success is almost impossible to forecast. The stocks of the businesses that produce them, however, should not be disregarded.
Consumers and investors frequently pay the most attention to new products. This frequently helps to bring the share price upward in the short run. And, as it positions itself to make a lot of money, the corporation has undoubtedly spent a lot of money on R&D and promotions.
Take Apple's 2001 launch of the iPod as an illustration. Initially, some investors and experts were unconvinced that the gadget would generate significant income for the corporation.
- That product, as it turned out, fuelled Apple's expansion throughout the decade.
Of course, new goods may not always turn out to be cash cows for the firms that create them, but if you get in on a good one early, the potential for profit is enormous.
Indicators of Technical Performance
- The stock chart for the most recent year and the previous five years should be your last stop.
- Is the stock price subject to seasonal fluctuations? In certain seasons, it may trade higher or lower on a regular basis.
Find out what trading trend this stock is in: Is the stock trading higher or lower than its 50- and 200-day moving averages? Is it a sparsely traded stock, or do millions of shares change hands every day? Is the volume increasing or decreasing recently?
A decrease in volume might indicate less interest in the shares, causing the share price to fall. Increases are often positive if the company's fundamentals are strong, which means it has good prospects for growth and it is well.
When you look at a company from a distance of 10,000 feet or more, you can take into account the outside factors that might prevent the stock from soaring.
Ten Thousand-Foot View
Consider the macro factors that may have an influence on the stock in addition to the press release. Rising interest rates, greater taxes, or changes in customer behavior might all have an effect on the stock.
Other external circumstances, such as an industry slowdown, might have an impact on the firm. These factors might just as well be taken into account as technical indicators and fundamental analysis.
Consider the case of Continental Airlines in 2006. The corporation was in decent health, but increased fuel prices and a string of airline bankruptcies appeared to be weighing on the stock.
Although the sector prognosis was bleak, Continental anticipated that its profitability would increase significantly over the upcoming year. In 2010, Continental joined United Airlines.
Language's Finer Points
Consider your perception of what happened in the quarter as you read the news release. Management may have extolled the company's numerous "potential" and reveled in its prior success. Or it might have listed the several "challenges" that the firm faces. Management may discover prospective business catalysts such as new products or acquisition opportunities.
- That rhetoric, in any event, can be as crucial as the profit guidance figures.
The terminology employed in these news announcements is purposeful. Many people in the public relations and legal divisions look through it.
A positive assessment is extremely encouraging, but a report with subdued language should be treated with caution.
Investors and their brokers are frequently forced to examine firms on the fly and make split-second choices to purchase, sell, or hold. Focusing on the most important facts allows people to avoid making impulsive decisions. Of course, a broker is required to trade or invest. If you don't already have one and are wondering which broker to use, conduct some research to discover a broker that will meet your demands.
