Common Tips for Buying Stocks

Introduction

Markets are beaming with strength as many stocks scale new highs in sync with the benchmark indices. The Nifty is trading near its all-time highs, and broader markets have also gained momentum. Remember that three out of four stocks follow the market. Many investors make a mistake of staying away when the markets make such new highs, thinking they'll get back when the markets correct. What are some common tips for buying stocks?

CANSLIM Methodology 

According to William O’Neil’s CAN SLIM investing methodology, the ‘N’ factor stands for a ‘New Product,’ ‘New Management,’ ‘New High,’ or any other new factor, which could produce a startling advancement in the stock. The positive change in a stock’s operating environment ultimately drives its price into newer realms. Taking positions in stocks that are at new highs may seem risky to the majority of investors. About 98% of individual investors would never buy a stock that makes new highs.

Rationale behind these buying tips

The demand for a stock is proportional to the optimism surrounding the future growth prospects of the company. In turn, the increase in the demand for a stock drives the price higher. In contrast, when a stock is trending downward, the distribution of shares is a result of the decreasing investor interest in the company’s future course of activities. Similarly, investing in a stock that is struggling to break above its lows implies diverting funds into less productive companies that will finally hit further lows with time.

Rather than buying every stock, which makes a new high, buy a stock that breaks out of a sound base pattern before it sails above the pivot on a volume that is at least 40% higher than the average. Investing in stock when the price is way too extended, say 7% or higher from its pivot, is not ideal as well. The market rally is a result of the performance of the overall strength of stocks. Picking stocks at new highs, breaking out of strong base patterns, helps to participate in a market uptrend.

Example

Stocks from our model portfolio, such as Indraprastha Gas (IGL), ICICI Bank, to name a few have all made new highs in recent times. We had added these stocks when they were breaking into new ground, very close to their all-time highs. Uninitiated investors often believe that they are investing in value when they go shopping for stocks that are close to their 52-week lows. The idea of buying from a discount sale in a supermarket rarely applies while buying stocks. Stocks on the new high list tend to go higher in price, while those on the new low list tend to go lower.

In conclusion, following these common tips for buying stocks will help investors stay ahead of the curve and reap even greater gains.

Disclaimer

Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.