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When to buy stocks for beginners

When to buy stocks for beginners

When to buy stocks for beginners?

How to know when to buy a share and most importantly when to sell it? 

At times we sit at a huge profit and are not aware of when to sell the stock. What if I sell it and the price rises further? 

What if I don't sell it and the price falls? A lot of confusion is there in this regard. Today we are going to understand this- What is the right time to buy and sell the share? 

Let's start with the right time to sell a share. A lot of people talk about buying a share, but selling is rarely discussed. 

So let me understand when should we sell a share? There are generally four major reasons to sell a share. 

The first reason is -Elimination of the reason for which you bought the share of the company. For example- A lot of people invest in HDFC bank because Aditya Puri sir is leading it. If he leads it then people have trust the bank will perform well. So if this is your reason... I am not saying you must sell the share if he leaves the bank. 

But if this is your sole reason that Aditya Puri Sir is leading the bank and he leaves the bank then your reason is not valid now. You should sell the share. Hence it is important that you note digitally/or on a diary the purposes of buying a share. 

As soon as the reasons vanish, the market might be in favor of the share. There can be a lot of reasons for the market to like the share. When your reason has vanished then sell the share. This is the first reason. 

The second reason is a structural change in the industry where the company operates. The industry is witnessing a change that it's way of earning, business models, etc are completely changing. 

A small example can be- About 10 years ago DTH industry was people's favorite. The cable will be digitized, every house will have a setup box. The government also promoted this. And then suddenly Netflix Amazon Prime i.e. OTT came into the picture. This completely blocked the growth of the Dish antenna industry. 

If something like this is happening- You thought that the industry has a 10-year growth but a new revolution/invention completely changes the industry. The past or present of the company might be brilliant but if the future is blocked then it is better to leave that industry. 

The third reason is limited capital. 

All of us have limited capital. We think that Jeff Bezos and Mukesh Ambani have unlimited capital. But if you ask them - they will also say that their capital is quite limited. All of us have limited capital. Earlier I did not have any idea. 

Hence I invested in an XYZ company. (buying its share) Now suddenly I catch hold of a great share but I don't have money. I have complete faith that this new share is better than the earlier one. 

In this case as well if your conviction is right then you can sell your earlier share and invest in the new share. This is also a valid reason. 

Now lastly let's talk about the most obvious reason. 

This reason is -The fundamentals of the company go wrong/worse. Assume that when you bought the share of the company it had low debt and high cash. But now cash has vanished from the company and it also took up debt. 

Further, the promoters have reduced their shareholding and shares have been pledged. All these reasons ruin the balance sheet and the company's health, then you must sell the share of the company. This is a simple reason. 

Hence I discussed it in the last. So these were the major reasons that signal towards selling a share. The share price has surged, hence you should sell? This is absolutely wrong. If you want to make abnormal wealth from the share market, want to become a great investor or want to change the fate of you and your family with the share market then 2, 3, or 5 baggers will not help. 

But you have to see 100x, 50x, and 20x stocks. Your stock will rise with 20x, 100x, 50x, etc when you will not sell it on becoming 2x or 5x of its value. You will have to show patience. If the share price has surged and you want to sell it before it falls- this is not correct. If you have faith in that company then give it a full chance. 

Now let's talk about the right time to buy a share. When should we buy it? 

Let me tell you when to not buy a share. Mostly-If a company is good then you can buy it almost every time. Companies like HDFC, HUL, etc never had an adverse time. (whenever bought by anyone) During some years these companies might not have given returns. 

But in long run consistent compounders like Pidilite, Asian Paints can be bought almost every time. But there are some points that you need to consider- When to not buy a share if that is a good company. If it's not good, you don't have to buy it. There is never a good time to buy a bad stock. 

The company has to be good; but when should you not buy the stock? The first point is- Excessive mob mentality for the company. This happens when the share is making 52 weeks high and media is covering it. If you feel that there is a mob mentality for the company and the share price is rising hence people are buying it then it is not the right time to buy it. 

As and when the bubble of the industry will burst then that company will fall to its intrinsic value. It is possible that your capital will erode at that point of time. The hottest selling sector in the news where all companies are doing well; you should beware of stars companies over there. 

Till the time you get aware of that company and the mainstream media covers it -that the share is dong well the share price has had its run till that time. It is possible that you are a bit late. 

The second best time to buy a share is  When a company completes its capital allocation cycle. Sounds complex? 

Let's make it simple. Assume that a company has earned extremely well in 5 years and its reserves have also increased. Assume that it has Rs.10,000 cr as its reserves. It has to build a new unit of manufacturing plant with that Rs. 10,000 cr. But the amount needed is Rs.15,000 cr. 

The company has Rs.10,000 cr and it takes a loan of Rs.5,000 cr from the bank. In the next 2 years, that plant got ready. But if you will see that company at that point of time you may feel that it does not have reserves and also has debt. 

Also as the plant is in progress and sales have not started generating; you will also not see high revenue or profits. In this scenario, it will seem that 2 years back the company had reserves and no debt. But post that it does not have revenues/profits and has debt. 

This company is turning worse. At that time we will reject that company. But the truth is that the time you reject the company; in the next few months company's sales and profits are going to double. If you buy its share today then you will acknowledge this company before others. 

After one year the media will cover it by saying- 'This company doubled its profits in a year.' But till that time you will lose the share price. Mob mentality would have started forming for that share. You have to buy it today. 

The third important factor is- Industry growth

If you have an aquarium in your house/restaurant then you would have noticed that a fish is always smaller than the aquarium. If the fish will be bigger than the aquarium then it will not fit into it. The industry is aquarium and fish is the company where you are going to invest. 

You might not have money to buy a big fish but you should buy a big aquarium. Tomorrow when you will have money then you can also buy the big fish. Always note that you should invest your hard-earned money in an industry that has medium-term growth (5-8 years growth). 

You should have a belief that the industry's (next)5-8 years' demand will not fall and people will not stop using the products. A simple example is- will people use mobile phones after 5 years? We can confidently say -Yes they will. 

I should have confidence that my company will perform well after 5 years (In this case the mobile phone will be used by people after 5 years). I know that after every 2-3 years phones need to be replaced. 

There is no saturation in this industry as replacement demand is quite high. From that perspective, if I find a company in this sector then I will give a green signal to the industry. 

Let's discuss DSLR cameras. As phone cameras are improving the DSLR cameras are being only marketed for professionals like videographers, cinematographers. Casual users are content with phone cameras. 

After 5 years their contentness might be even more. Will DSLR cameras have the same demand after 5 years as it has now? I can't bet on this. So I might not choose a camera manufacturing company. 

It is important that you are reasonably confident about the selected company's growth in the next 5-8 years. If you have considered this point then you have reduced your risks. When to buy and sell a share? I hope I was able to help you.

Also read: How many types of mutual funds are there in india

Also read: How to Build a Portfolio with ETFs

Also read: What is meant by bonds in stock market

Also read: How to invest for retirement at age 60



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