This is a question in every long term investor’s mind. There is a stock which has been in your watchlist for so long and yet there has not been any good opportunity to accumulate it. It always seems like it’s not the best time to buy that particular stock. So if that’s the case, what should be the best strategy to buy the stock and more importantly when is the best time to buy the stock?
Even though there is no such thing as the “best” time to buy a stock, these are the best case scenarios which can be used to buy stocks to get good returns over a long term.
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Market Crash
This is without a doubt the best time to buy any stock. Market crashes occur very rarely and provide a good opportunity for buyers because everything is on sale. Regardless of how bad the news is or even if it seems like it’s the end of the world, the stock market over the decades has shown that it always bounces back. So if there is a stock on which you have your eyes for a very long time and you have not been getting the opportunity to buy it, then a market crash is a lifesaver.
However, one important point to note is that a market crash refers to a situation when the entire stock market (and the major indexes) have gone down. This strategy does not really work when only a particular stock has gone down and not the entire market. In that scenario it is highly likely that the particular company is facing some hardships. This will require a much more detailed analysis and will depend on a case by case basis.
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Stock is in consolidation phase
Stocks often go into a consolidation phase after any major move (towards upside or downside). A consolidation phase is a phase in which a stock is completely range bound and is not in clear up or down trend. It is a phase where the stock appears to be stuck at a price and shows little volatility. This is a great time to buy stocks! A long consolidation phase is a great sign that the market accepts the price of the stock to be ‘fair’ regardless of whether the valuations of the company are expensive or inexpensive.
However, even a down move is possible after a long consolidation phase. This is why a good stock selection is required before the actual accumulation. To learn more about stock selection, visit this article! A growing business along with a consolidating stock is a great opportunity to buy the stock because the stock price will eventually move to align with the value of the business over the long term.
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Stock is in an uptrend
An uptrend is a phase in stock movement when the stock makes higher highs and higher lows. It is a phase where the stock moves higher and higher over time. This is an example of a stock in uptrend.
A trend in the stock market can continue for weeks, months or even years! A stock like TCS which is considered to be a reliable large cap company in India, has been in an uptrend for many years. Buying a stock which is in an uptrend has a higher probability of providing good returns because trends can continue for a long time. Almost all blue chip stocks which have provided great CAGR over many years have stayed in an uptrend for many years.
However, there is always a possibility that the uptrend might reverse. If a stock has been in an uptrend for a long time, the possibility of a trend reversal or a consolidation keeps on increasing. An investor should be cautious of short term investments in a company which is continuously in an uptrend.
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Stock is bouncing from a support
A support (in technical analysis terminology) refers to a zone where buyers become active in the stock and do not allow the stock price to fall below the support price. This is a great time to accumulate a stock because a stock is available at a lower price and has a higher probability to bounce up from the support.
The support and resistance levels of a stock are generally followed closely by stock traders, not investors. But having a good understanding of technical analysis and identifying stocks which are close to the support levels can provide investors a great opportunity to buy stocks at a discount. Stocks generally approach their support levels during a correction or a consolidation which means that the stock is on sale. And every long term investor loves a good sale!
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Nobody is talking about the stock
This is more of a psychological point rather than a fundamental point. Most retail investors make the mistake of buying a stock when it has become the talk of the town. That’s generally the worst time to buy the stock because that’s when big funds start to sell their holdings. When nobody is talking about the stock, it is generally available at a cheaper valuation. The best time to buy a stock is when you have identified a great company and nobody on TV or rating agencies are talking about it!
Because once the euphoria starts, many investors start to buy the stock at exorbitant high valuations hoping that the next person will buy the stock at an even higher price. This can keep on going until the stock market runs out of such investors who are willing to buy the stocks at higher and higher price & eventually the correction begins.
There is no such thing as the “best” time to buy a stock because every investor in the stock market has a different goal, time horizon & risk capacity. Also, it is impossible for anyone to buy stocks at the lowest price possible! However, using these points can guide the readers to correctly accumulate the stocks and avoid traps due to which many retail investors end up failing in the stock market.
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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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