New investors often get excited about entering the market. However, before making any moves, it’s crucial to understand the factors that influence stock buying, selling, and holding decisions to maximize growth and limit losses.
There is no guaranteed way to predict how a stock or asset will perform, as prices are influenced by numerous factors, from broad market conditions to individual business performance. While there is no one-size-fits-all strategy, professional traders follow certain “rules of thumb” when considering investment moves, such as setting entry and exit points and evaluating fundamentals.
Individual traders can study these general principles and develop their own buying and selling methods over time.
Entry and Exit Points
An entry point is the price level at which an investor buys into an investment, while an exit point is the price at which the investment is sold. Ideally, these points are predetermined to minimize risk and maximize profits, helping investors avoid making emotional decisions.
Investors aim to set entry points to maximize their profits. While some adopt a long-term buy-and-hold strategy, others believe it’s crucial to know when to cut losses when stock values decline. Many traders assume that holding onto an underperforming asset until it rebounds is a good approach, but this can be a mistake if the asset continues to decline. While some investors stick to buy-and-hold strategies, many professional traders plan their buys and sells carefully.
Traders often use stop and limit orders to maximize gains and minimize losses. Instead of constantly monitoring price movements, they can set stop or limit orders to execute trades automatically based on their plans. These orders specify a certain price at which they want to buy or sell stocks. By setting stop or limit orders above or below the current market price, traders can time their trades to reduce losses or increase profits.
Limit orders ensure a trader buys or sells a stock at a specific price or better. For example, if a stock is currently trading at $65, and a trader wants to buy at $60, they can set a buy limit order at $60. Similarly, if they plan to sell at $70, they can set a sell limit order at $70.
Stop orders are more commonly used as a defensive strategy to minimize losses. If a stock price rises, traders may set a stop order below the current price to protect their gains. Conversely, if they expect the stock to decline further, they might set a tighter stop order just below the current price to minimize losses.
Both stop and limit orders trigger automatically when the stock reaches the preset price. If a trader sets a sell limit order at $70, the stock will automatically be sold if it reaches that price. If they set a stop order below the current price, the stock will be sold when it falls to that level. The key difference is that limit orders sell at a higher price (profit-taking), while stop orders sell at a lower price (loss prevention).
However, these orders come with risks. Limit orders guarantee a price but may never be executed. Meanwhile, stop orders become market orders once triggered, meaning the actual sale price could be lower than expected.
Another risk of stop orders is that they can lead to unwanted sales. For instance, if an investor buys a stock at $65 and sets a stop-loss order at $60, the stock may briefly drop to $59, triggering the sale, and then quickly rebound to $70. This scenario can result in an unnecessary loss.
How Traders Use Financial Statements
When deciding whether to buy, sell, or hold a stock, investors often analyze a company’s financial health using financial statements, such as quarterly reports required by the U.S. Securities and Exchange Commission (SEC). These reports are available on the SEC website and the company’s investor relations page.
Key financial indicators include:
- Revenue (sales growth): Is revenue increasing or declining?
- Earnings guidance: What are the company’s future earnings expectations?
- Cash flow: Is the company generating more money than it is spending? Positive cash flow indicates financial health, while negative cash flow can be a warning sign.
- Earnings per share (EPS), gross margin, dividends, and stock buybacks are also important factors.
How Traders Use Technical Analysis
Technical analysis evaluates past price trends and patterns on charts to predict future price movements. Unlike fundamental analysis, which examines financial statements, technical traders use visual patterns to determine the best times to buy or sell.
Chart patterns, moving averages (e.g., 50-day or 200-day moving averages), and trading volume help traders identify trends and momentum. A rising moving average suggests an uptrend, while a declining one signals a downtrend. However, since trends can change at any time, technical analysis is still a retrospective approach.
Conclusion
There are many factors to consider when buying, selling, or holding stocks. Professional traders rely on key information to make decisions, and new investors can develop their own strategies by gradually building knowledge. Learning about financial reports and price trends is a great first step in determining whether an asset aligns with one’s investment goals.
Ultimately, each investor must decide the best strategy based on their timeframe and risk tolerance.
