So, you want to invest in shares? Not a bad idea if you are determined to make some real money. Shares can bring you a high return, especially in the long term. Anyone who wants to grow funds through investing can find what they’ve been looking for with share investments. But a question that will pop into the mind of any thriving investor is when to buy shares?
When buying shares, you need to factor in your investment strategy, your budget, the market sentiment, and whether you’ve done your homework—that is, researching the potential investment. Considering all of this will dictate the best time for you to buy shares.
Strategically buying shares doesn’t need to be complex. If you know how to moderate your purchasing habits, you will make smart investments. Shares are a high-risk investment, so you shouldn’t blindly chase after every lucrative offer. Instead, make reasoned decisions with the help of this simple guide.
How To Know When To Invest In Shares?
Do you feel excited about having part-ownership in a company? Is the investment money burning a hole in your pocket, trying to get out? Should you just do it? Should you buy a share, any share? No. Stop, and drink a tall glass of ice-cold water. Now we can have a clearheaded talk about when you should invest.
How often you should invest in shares should be a calculated and thought-out decision. Shares are a risky investment and without proper preparation, you can lose your money in a heartbeat. If you let euphoria or panic influence your decisions, your journey as an investor can quickly come to an end.
So, put your emotions aside and take into account the following:
- Investment strategy;
- Budget;
- Market sentiment; and
- The analysis of the company you want to invest in.
Investment Strategy
Investment strategy refers to a set of principles and beliefs that guide the investor’s decisions. Relying on your investment strategy will ensure that you stay grounded and make every purchase according to your pre-set plan. Why does this help? Staying true to your philosophy will put reasoning above emotionally triggered decisions.
You can develop your own investment strategy based on:
- Your goals
The goal is usually the main cornerstone when it comes to investing. Always look back to your goals when in doubt whether you should buy a share. For example, if the goal is to turn investing into your job, you can buy shares more frequently. Since you’ll be actively watching over the market, and have a decent amount of money to dispose of, you can give yourself the luxury of buying shares whenever a great offer surfaces—whether that’s once a week, or twice in a year. If you do want to become a full-time investor, you can learn more about it in my post ‘How Can You Make ‘Investing’ Your Career? Here’s How!’
- Your risk tolerance
How resistant are you to risk? While investing in shares comes with multiple risks—including price volatility, capital loss, and no guarantee of dividends—you should think about your readiness to invest in shares with promising, but not guaranteed potential gain. If you come across shares of a startup in a promising field like biotechnology, are you willing to put your money on it? Do you even want to invest in newbie companies, or do you want to stick to corporations with history to moderate the risk? When you make this decision, you’ll be better at assessing when to invest.
- Your time frame
The time frame is your willingness to let the investment rest. How patient do you plan to be with your investments? Do you want to trade the old ones after a given period and buy new shares, or do you want to hold them for a few years? The time frame and the goal are linked because if you want to save for retirement you should hold the share as long as possible. But if you need money sooner, you can trade the shares more frequently. However, don’t forget to be patient because it can take time for shares to give you remarkable gains. If you are confident in your investment, try holding it for at least three to five years.
Budget
Every investor should decide how much he or she is willing to dedicate to investing. Have you already done this? Do you have your investment stash ready? If you don’t, you need to figure out your investing budget.
As I mentioned in my ‘How Much Should You Be Investing (And When!)?’ post, financial experts advise that you allocate between 10-20% of your annual salary for investing. You should always have enough money to cover your living expenses for three to six months. The rest can go into investing. But, when you reach the investing budget’s limit, you should put buying shares on pause.
Yet, there is another relevant factor to consider. You don’t want to spend the whole investing budget on volatile assets. Keeping your portfolio diversified gives you security. Many investors go with the 5% rule of investing. This is an investment philosophy that recommends that investors should never allocate more than 5% of the portfolio to single investment security. So, if one or two investments fail you, you’ll still be going strong thanks to your diversified portfolio. To learn more about diversification, you can check out my detailed explanation in the ‘Only Invested In One Stock? Here’s Why That’s A Bad Idea’ post.
Market Sentiment
Would you go to a restaurant while an earthquake shatters its walls? No—nor should you go shopping for shares without looking into what’s happening on the market.
The unpredictability of the market is one of the core reasons why you can set a specific number of how often you should invest in shares. Blindly following your desires against the market signals can get you into trouble.
A market in turmoil that directly affects the shares you’ve set your eyes on can open up an opportunity to buy shares at a bargain price. Unfortunately, the herd mentality usually makes investors back off from buying shares in times of uncertainty. But, instead of following the crowd, you should assess the situation on your own.
Start with analyst reports and consensus price targets. You can find this information on financial websites, or you can consult a financial expert.
Also, stay on top of undervalued shares. Their price can go down due to some change in the market, but the potential for gain can be high. What can help you spot undervalued shares is an analysis of the company’s profits and prospects for growth. Speaking of analysing the company, let’s jump straight to the next relevant step for investing frequency—researching the company.
Company Research
Imagine that you are buying a house—your future home. Would you cash out for the first property that looks pretty, or would you take a tour, ask a million questions, and inspect it for structural issues, mould, plumbing, dampness, and so on? You should do the same detailed investigation for the issuer of your target investments.
Look into the company’s performance, by digging out the following information:
- The annual report;
- Comparison of the company’s market price to its book value;
- Operating profit margin—Divide operating profit by net sales;
- The company’s liquidity;
- Asset turnover ratio—How efficiently is the management team using assets to generate revenue;
- Prospects for growth and profits;
- Dividend growth;
- Debt-to equity value; and
- News releases about the company’s new ventures.
Does all of this seem like too much? Maybe you don’t feel like spending time on getting to know a company inside out, but that doesn’t mean it shouldn’t be done.
You can always resort to hiring a financial expert to do the analysis for you. As long as you get your report, and base your decision on it, who cares if you didn’t make it.
If you want to get better at recognising promising investments, add it to your routine to read about the experiences of successful investors. You can check out my list of recommended books for starters. By analysing how investors with experience determine which investment is purchase-ready, you can adopt the same profitable habits.
What You Need To Know Before You Start Buying Shares
Now that we’ve got the topic of frequency of investing settled, it is time for some extra tips. Whether you are new to investing in shares, or you have some experience, there are few common roadblocks that many investors overlook.
To make smart investing moves, keep these tips at the back of your mind:
- Don’t rush into trading—Give your shares time to reach their true value. Patience is a virtue in investing and it can earn you lots of money if you develop it.
- Regularly rebalance your portfolio—Do a routine check of the balance of your shares to keep the risk moderate. For example, if you aim to keep your tech shares at 40% of your allocation, but the strong run in these shares resulted in them taking over 50% of the allocation, you can sell some to regain the balance.
- Evaluate your strategy—We talked about how the frequency of investing depends on your philosophy, budget, market, and company’s performance. All of these factors can change and so can your strategy. So, if your goals change, for example, you should reevaluate your overall investment plans.
- Don’t trust the yellow pages (or any, for that matter)—Never base your investing plans on what you read in the papers or website. Rely only on hard facts, market history, company history, and other analyses. If you allow market news to direct your strategy, it won’t be called a strategy anymore.
- Know when it’s time to walk away—While long-term investments are typically more profitable, sometimes you will need to sell shares and move on. If the share falls through your set loss limit, you should rip the bandaid and sell it. Respecting your pre-determined loss limit can help you establish a boundary.
- Buy what you understand—So many investors buy shares in companies without having a clue what that business does. Maybe a neurosurgical company sounds promising, but if you know nothing about this industry, you won’t be able to understand where the market is headed and how certain changes affect the trajectory of stocks. When you invest in what you know, you’ll have an advantage over other investors as you’ll be able to follow up with industry news.
Determine the Frequency Based on Research and Reasoning
Investing isn’t predictable. There is no certainty as the price of shares and profit depends on outside factors you can’t control. When you understand the unpredictable nature of investing, and add to that the volatile nature of the stock market, you will see why there is no specific frequency for investing in shares.
Luckily, you don’t need to roam the market, buying shares on a hunch or a whim. Rely on the above-mentioned factors to make calculated purchasing decisions.
It’s all about research and moderation folks. As the study “Trading Is Hazardous To Your Wealth” by Brad Barber and Terrance Odean found, investors who traded too often underperform the market by a whopping 6.5% points every year. So, keep your head cool, diligently investigate potential investments, and you’ll know when is the right time to add a new share to your portfolio.