21 Mar 10 Reasons You Give Yourself When You Buy a Stock
As Investors there are many reasons why we want to invest in a stock. I have listed ten of them below.
1. The price of the stock has fallen due to a series of bad news. It has been dropping for the past eight trading sessions. It cannot keep falling forever, and sooner or later the trend has got to reverse.
2. Price of the stock is now at support level. For the past year the price has gone up and came down to this level five times. The moment it retraces to this level the buying activity returns. The support looks strong and unbreakable. Downside is capped.
3. Both the Chairman and CEO has been buying stocks in the company recently. Insiders know the true value of the company. When they start increasing their stake, it usually means that the stock is under valued and there is potential for price to increase.
4. The stock distributes good dividend historically. Over the previous years the company has given out 5% per annum on the average. Owning shares of the company will create a passive income stream.
5. The Price to Earnings (PE) Ratio of the company is below industry average. Furthermore, analysts are forecasting positive earnings growth for the company from a new product launch. The rise in earnings is likely to drive a further rise in price.
6. At a Chinese New Year gathering, relatives start talking about stocks. Uncle informs everyone that he knows the Chairman of a property developer and that the company’s stocks are a great buy now. This is because they sold out all their recent projects at record prices and their new launches will be priced even higher, eventually leading to huge profits when they announce their financial results.
7. A new board and a new CEO is being installed in this company. The CEO is an industry veteran who has great track record of turning companies around and he has the full support of the board. Confidence is high.
8. The company has just received a buyout offer from a majority shareholder. It is now trading at the offer price. General consensus is that the offer price is still lower than the Net Asset Value (NAV) per share and minority shareholders would vote to reject the offer outright. In that case a higher offer might be forthcoming.
9. Price has broken new high on huge volume and strong buying interest. The company has attracted positive media attention recently and many analysts are now writing about the potential of the company, calling it a strong buy.
10. Price to Book (PB) Ratio is 0.5. The company has good assets, substantial cash and no debt. Operating cash flow and earnings are positive and stable. Volume is low and there is very little retail interest in the stock.
You would have bought stocks based on some of the reasons listed above. However, some of them are more compelling than others.
Take a moment to look through them again. Leave a comment below and share with us
1. Which are the better reasons for buying and which ones are not as good
2. Your experiences buying stocks based on any of the above cases
3. If out of the ten you can only pick one to base your buying decision on, (yes, force yourself to pick one) which one would it be?
We look forward to hearing from you!