Lessons On Buying Stocks

How To Select The Right Stocks At The Right Time


The seven lessons in this course explain the characteristics of successful stocks and the forces that push them up. The first seven lessons explain specific traits to look for when buying stocks.

6) Avoid ‘Bargain’ or ‘Cheap’ stocks

Many investors have missed the opportunity to invest in great stocks only because they had reached new price highs. Unfortunately, most investors believe that the stock, after having touched its new high, has become expensive, and the only way forward, is down. These investors are then disappointed when they see these stocks touching new highs going forward. The truth is, when a stock touches a new high, it usually is the time when the stock begins its major climb.

Research shows that the best-performing stocks make new highs before they make their major leaps in price.

How many times have you heard the phrase, "Buy low, sell high"? This is the conventional wisdom in the investment world; however, research shows that the best-performing stocks make new highs before they make their major leaps in price. Moreover, stocks at new highs tend to continue moving higher, while stocks making new lows tend to continue to move even lower.

Stocks that seem too ‘expensive’ and risky to most investors are likely to continue rising. And those that seem ‘cheap’ usually go down.

This is a concept many investors find difficult to accept. They assume it's too late to buy a stock that's reached an all-time high. But the great paradox of the stock market is "Stocks that seem too ‘expensive’ and risky to most investors are likely to continue rising. And those that seem ‘cheap’ usually go down."

Why does a stock’s price rise? It indicates greater demand for that stock as investors (primarily institutional investors) raise their expectations about the company’s growth prospects. On the other hand, stocks whose prices reach new lows usually indicate poor business prospects, which, in turn, results in lower demand from investors for that stock.

Some stocks may have very strong fundamentals or great stories, yet they don't go up because there's little investor interest. So while you wait for a stock to be ‘discovered’ -- if it ever does -- other stocks are moving into the spotlight.

Would you shy away from stocks that more than doubled within the past year? Consider taking a look at what happened with the greatest stocks of every bull market. They looked overpriced and risky to buy just before their biggest move up.

In a good market, opportunities such as these, which start with new price highs, will surface every two or three weeks. In fact, if you ignore this simple rule, you would miss out on just about every major winning stock.

As a rule, don't buy any stock that has risen more than 5% past its buy point.

However, there can be such a thing as an "over-priced" stock: one that truly has gone up too much, too fast and is likely headed down. As a rule, don't buy any stock that has risen more than 5% past its buy point. The buy point is explained in the lesson on charts.

One reason new highs represent better opportunities is because of something market pros call overhead supply. Suppose a stock that once traded at Rs.50 falls to Rs.25. If it starts making its way back up, investors who bought near Rs.50 start hoping the stock gets back to the old high so they can sell and break even. This presents selling pressure near the Rs.50 mark. But once it clears that Rs.50 hurdle, the stock is no longer burdened by disappointed investors looking to wipe out their losses.

Perhaps you're one of those investors who think they'll hit the jackpot buying a low-priced stock that goes on to make huge gains. Some investors equate cheap stocks with better value or low risk. If a stock is cheaply priced, then you can't lose a whole lot, right? Wrong. The truth is that trying to consistently make money with cheap stocks is difficult, at best. Stocks are cheap for a reason. Think of a stock's price as a measure of its quality and, consequently, its potential. Stocks selling cheap have a much smaller chance of making major advances, because they're usually companies lacking good performance records. Also, professional investors shun low-priced stocks because they tend to be lightly traded, making it harder to move in and out of such stocks.

So, you can see what research bears out: it's best to look for new highs in quality stocks. It's especially good when the stock is coming out of a base. But don't wait too long: As soon as you spot a buy point -- and if all other factors are in place, such as good earnings growth -- it's time to have confidence and conviction and make your move. Otherwise, you may miss your opportunity.

Like you've seen in earlier chapters, you don't want to buy a stock on any single factor. Where a stock is in relation to its 52-week high and low price, is just one part of your stock-selection checklist. Other important ingredients are the Earnings per Share (EPS), the Relative Price Strength (RS), the Industry Group Relative Strength, and so on. These concepts are explained in the lessons on earnings, leaders and industry groups.

Also, be careful with stocks that make new highs on lower trading volumes. This could be a sign of a stock topping (reaching its peak), especially in cases when a stock has gone up at least 50% in a few weeks after an extended advance. When a stock goes up on low volume, it's a gain produced by relatively small purchases. It's much safer to go with a stock that makes a new price high on higher volumes, which indicates broader support for the stock.

  • Quality stocks making new price highs just as they emerge from sound bases on higher volume are often likely to continue climbing, while stocks making new lows are probably headed even lower. Therefore, focus on the new price highs list for the best potential opportunities.
  • The great paradox of the stock market is that what seems too high and risky to most investors is likely to continue rising. And what seems low and cheap usually goes down.
  • You can think of a stock's price as a measure of its quality and, consequently, its potential. Typically, stocks higher in price reflect higher quality.

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7 Comments


Rohit khot
Aug 06, 2018 at 08:09 Reply

Thanks, lot StockAxis company is very good


Team StockAxis
Aug 09, 2018 at 12:59

Dear Rohit khot,

Thank you for visiting us and believing in us!

We recommend you to also read the following blogs.

Has the Recent Correction Made Valuations Attractive?

Regards,
Team Stockaxis


n k chaudhary
Aug 06, 2018 at 11:10 Reply

good suggestion


Team StockAxis
Aug 06, 2018 at 04:38

Dear n k chaudhary,

Thank you for visiting us and believing in us!

We recommend you to also read the following blogs.

StockAxis Market Intelligence

Has the Recent Correction Made Valuations Attractive?



Regards,
Team Stockaxis


Chandra shekhar Singh
Aug 04, 2018 at 09:40 Reply

Very good article. Every matter has been referred while buying a share. It is most difficult to search the EPS of a stock before 4 years.


Team StockAxis
Aug 10, 2018 at 12:30

Dear Chandra shekhar Singh,

We require some clarification on the question that you have raised.

We tried reaching you on your cellphone number but we believe you were busy.

Please contact us on 022 - 66393000 so that we can help you with your query.

Regards,
Team Stockaxis


C p singh
Aug 04, 2018 at 01:57 Reply

Thank you for giving knowledge


Team StockAxis
Aug 06, 2018 at 09:47

Dear C p singh,

Thank you for the appreciation, Sir.

We recommend you to also read the following blogs.

Using the EV/EBITDA multiple smartly!

Use The P/E Ratio Smartly!



Regards,
Team Stockaxis


Sureshchandra M. tripathi
Aug 04, 2018 at 01:41 Reply

best suggesions.


Team StockAxis
Aug 06, 2018 at 10:56

Dear Sureshchandra M. tripathi,

Thank you for visiting us and believing in us!

We recommend you to also read the following blogs.

Use The P/E Ratio Smartly!



Regards,
Team Stockaxis


SANKARANARAYANAN RAMASWAMY
Jul 14, 2018 at 01:42 Reply

"when a stock touches a new high, it usually is the time when the stock begins its major climb". ' "Stocks that seem too ‘expensive’ and risky to most investors are likely to continue rising. And those that seem ‘cheap’ usually go down.". " The truth is that trying to consistently make money with cheap stocks is difficult, at best. Stocks are cheap for a reason" These are all Golden Sayings !!! I am in the market sine 2008 and I learnt a lot from the Lesson 1 itself. Very very useful and thank you so much for the tuition. Please keep continue the Services as we need to learn a lot from you.


Team StockAxis
Jul 16, 2018 at 04:11

Dear SANKARANARAYANAN RAMASWAMY,

Thank you for your appreciation, Sir. We thank you for visiting us and believing in us!
We promise to continue these lesson so as to let investors informed decisions in the stock market.

We recommend you to also read the following blogs.

StockAxis Market Intelligence

Has the Recent Correction Made Valuations Attractive?

Regards,
Team Stockaxis


Tapas Kumar Bhattacharyya age 55
Jun 22, 2018 at 05:09 Reply

After reading "Lessons on buying stock " I clearly understood selections of stock are not a easy task. Lot of research and analysis is required for it. But a simple question as a simple investor from where I will collect this huge amount of data? Moreover I don't have such analytical skills also.So what can I do? Without verifying the factors (that you have mentioned) I have created a small portfollio also on the basis of general idea where the shares are not performing well.So,in this circumstances what should I do? Please suggest me.


Team StockAxis
Jun 27, 2018 at 04:08

Dear Tapas Kumar Bhattacharyya age 55,

You can get data from BSE/NSE or analyzer of Stockaxis. For your portfolio, we can help you by reviewing it. We request you to get in touch with your RM on +91-9167773172 and submit your portfolio. Additionally, we have also asked your assigned RM to contact you and help you with your portfolio review.

Regards,
Team Stockaxis