There’s a slightly disconcerting piece of advice out there when it comes to buying stocks. Here’s what you should keep in mind: the stock you’re buying is being sold by someone else. Unless you’re getting shares fresh from the company, then you’ve got to keep that in mind. Sounds redundant, right? Obviously, you’re buying something that someone else is selling. But think about it. Why is someone selling that stock?
The stock market is somewhat of a game between investors. It’s akin to chess in many ways. People forget about this aspect of the stock market. The person on the other side of this deal has decided, for whatever reason, that the best thing to do is get rid of that stock. Of course, you could assume that they really want the cash right now. But don’t always assume this.
The buying of a stock is what is said to begin the entire investment process. So it makes sense, in a way, that most advice about buying stock gives all its attention to that initial purchase. But what’s the point of buying stock? It’s to sell it. The sale is what actually brings the profit - or the loss - that was the inherent risk of buying it in the first place. So when someone sells stock, you need to pay attention. Think about it. People say that buying begins the process - but if no-one sells, then how do you buy?
So when you research a company, you need to think about why someone would sell shares in a company like this. It’s the question you should ask yourself when you’re checking the economic news. If you’re researching a pretty big and profitable company, then generally the answer is apparent. You only need to take a quick glance at Apple stock news to determine most are selling simply because they couldn’t wait to cash in. But, again, it’s not always that clear-cut.
So research the company and force yourself to consider negatives. Are the company losing market value? If they’ve not met their short-term earnings forecast after a set period, people will begin to sell. This doesn’t mean you shouldn’t buy, though. It’s likely that you’re buying from investors who simply don’t want to weather that particular storm. It could still pay off for you in the long run! The fact is that the impact of a company’s failure to meet these forecasts can be greatly exaggerated.
A smarter move is to try to judge a company’s strength by comparing their valuation against the price of their stock. Look into an expert’s valuation of a company that you’re interested in. If it’s determined that the valuation doesn’t justify the price of their stock, then that will probably explain the desire to sell. You may find that different people offer different valuations, however.
The most reliable indicator of all, however, is a company’s price-to-earnings ratio. This is the company’s share price divided by its earnings per share. It’s one of the most important things to check when you’re buying stock and wondering why someone is selling theirs. If a company doesn’t have a good price-to-earnings ratio, then investors are going to sell. If you find that to be the reason, then you should strongly consider taking your investment elsewhere!