With the never ending temptation to earn more when the market is in investor’s favour, we play battle within to decide when to execute the trade for getting the highest return possible.
--BY NEHAL PRANAMI
Buying and selling decision has always been the confusing task for a stock market investor. Trying to get highest return with minimum risk, an investor always questions which time is the right time.
With the never ending temptation to earn more when the market is in investor’s favour, we play battle within to decide when to execute the trade for getting the highest return possible. But rather trying to earn highest return, we should try to earn our planned return.
If the stock prices of a company whose stocks you hold keep on rising, sell the shares when your goal is reached. Give a sell stop limit order to oneself and be aware that what went up will definitely come down soon unless you hold the shares of Apple, Coca-Cola, Intel, Microsoft, etc whose shares are generally stable.
Now, what if the stock price continuously goes down? Fix the maximum loss amount that you are comfortable to incur and sell the shares immediately you reach your limit without waiting for future rise in the stock price. Again, you buy the same shares at the lowest price possible when that share starts a trend to rise. This enables investor to cover their loss incurred when the share price was low. For example, suppose you hold shares priced at Rs 66 per share whose value starts declining. If you sell those shares when the price is Rs 62 per share, you incur a loss of Rs 4 per share. So, again you buy the same shares when the price reached 40 per share and is in a upward trend. This way, you can cover your initial loss amount when share price reaches Rs 44 per share and if it goes even higher than additional amount will be profit. However, if you would not sell the shares when priced at Rs 62 per share or any other price, you had to wait until the share price again reaches Rs 66 per share, just to cover its loss amount.
But, how to know that the share price is at its lowest or say when is the market going to go up (be bullish market)?
Frankly, there is no magical formula to exactly know that the stock price is going to rise. Decision on the right time depends on thorough analysis and the factor of ‘luck’ of the investor. But, there are some small tips to help you understand the possibility of increment in stock price.
• Improvement in economic statistics means improvement going on in the stock market as well.
• Rise in sustained EPS of the company is good indication that the price is going to go up. However, it can be due to change in company’s accounting policies too.
When all the investors are in line to buy a particular share, don’t join them. Increased demand means higher price. Similarly, if majority people are selling the stocks, price goes down which is good time to invest in potential stocks.
Interest rate and stock market are two corners of a see-saw. When the interest rate in the market is higher, NEPSE goes down as saving in bank account becomes attractive to the investors. It leads to lower demand for investment in securities, further leading to decrease in stock price which is a good time to buy and hold shares. In July 2016, NEPSE reached its highest point of 1881 and the average interest rate on deposits of BFIs at that time was around 3.28 percent. Currently, NEPSE is trending downwards, increase in the interest rate being one of the reasons.
Buy the shares of a company immediately when the company declares distribution of dividends. If a firm declares that it will be distributing dividends, you should be a shareholder of that firm buying its stock to enjoy such dividend. Similarly, buying shares is good choice when declaration regarding the issuance of right or bonus shares is made by the company.
Most of the investors sell their shares at the end of the year i.e. in the month of Ashadh, to enjoy the tax benefits if they are facing loss in their existing shares, which results in decrease in the share prices due to oversupply of the shares in the market. So, depending on your objective, it is good time to buy new shares or sell the existing shares that are causing losses.
However, narrow framing is never a good option for an investor. A proper analysis of all the factors affecting stock price is an important task to earn substantial profit. A small hole can sink whole boat. Similarly, a small change in the environment can disrupt the stock price movement.