The best time to buy and sell shares for you to make money
Happy New Year! As the economy edges past the ravages of the Covid-19 pandemic, this year could be the year of financial opportunities and recovery. One of the opportunities you may want to look at to make money is the Nairobi Securities Exchange.
This is where you can earn passive income from buying and selling shares. However, making money is not as simple as clicking ‘Buy’ or ‘Sell’. You must get your timing right.
When to buy
The best time to buy shares is during a bear market. This is the period when prices for the majority of stocks on the market are on a free fall. It is worth noting that a bear market will affect stocks including those that are fundamentally valuable. This means that during a bear market, you can buy shares of valuable companies at significant discounts than you would otherwise buy during a bull market.
Michael David, the CEO of MoneySense Ltd, an investment firm based in Nairobi, and the lead coach at Team MoneySense, a personal finance and investment WhatsApp group, says that before you spend your money, you must realize that intelligent investing is paying less for more. “This includes buying assets or shares at a big discount to intrinsic value or for less than they are worth. For example, the equivalent of buying shillings for cents,” he says.
Apart from getting your timing right, you must also get other factors right as well. These include dividend yields vis a vis the trading price. Robert Ochieng’, the chief executive officer at Abojani Investment says that you should buy companies that have fundamentally strong attributes, which are trading below their value but producing greater dividend yields.
Ochieng’ further points out that other factors you should refer to before buying a share are whether the companies in question are recording consistent growth in profitability and revenues and whether their prices are below their book value, their development strategies and growth of business numbers. Getting your timing right does not always mean that your investment will be immune from market shocks. In fact, shares that were bought at huge discounts have taken years to produce their actual value to investors.
For example, it took the Safaricom stock nearly five years before it could trade at double the 2008 IPO price of Sh. 5 per share. “You must approach investing in the securities market as a risk management venture rather than a profit maximization opportunity,” says Mr. David. He says that at all times, your buying rule must always be ‘I’ll buy only what I can afford to lose’! “Invest your money in such a way that you will be able to survive the bad times,” he says.
When to sell
The time you sell should be conversely related to the time you bought your shares. This means that if you bought your shares during a bear market, you should sell them during a bull market. Buy when everyone is selling and sell when everyone is buying. You should sell your shares if the market has showered them with so much love that they no longer reflect the true value of their companies!
“Only sell when shares are selling at prices that don’t justify their intrinsic value, when everyone is willing to over pay because they think stock prices can only go higher,” says David. He adds that when time is ripe to sell, everyone around the country will tend to take a very keen interest in the rising stocks. “Even Mama Mboga will know which share prices are increasing and could even offer tips on which are the best to buy. This often happens during a sell-shares market,” says David.
But before you sell your shares, you must have a good reason why you are selling. Ochieng says that you must put your investment decisions in writing at all times. “For each stock in your portfolio, write down why you bought it, your expectations, and what you would make if you sell. Refer to it frequently and before you decide to give your stock the heave-ho,” he says.
Also, every share sale must be backed up by good reasons. Ochieng says that these reasons include the availability of better investment opportunities and the nature and performance behaviour of the company whose stock you hold.
“You must always consider selling a less attractive stock, even at a loss, if there are better deals that will earn you more money in the market,” he says. This means that you will exit a share not because it was a bad pick, but because you have spotted better opportunities in the market. At the same time, radical changes in the operability and financial position of the company whose shares you hold must always be an influencer on whether you continue to hold a stock or sell. “It could be that there is no foreseeable way for a crumbling business to turn things around. It could also be as a result of major acquisition, a change in management, or a shift in the competitive landscape,” says Ochieng’.
He recommends that you sell your shares if the company's ability to crank out profits is crippled or clearly fading, management has undergone significant changes or makes questionable decisions, a new competitive threat has emerged, or competitors are performing better than expected. “It is also important to check out for developments in a company’s industry.
“For example, it could be that the industry is undergoing a temporary downturn. In an economic downturn, financial figures may suffer even for the best-run companies, which in turn will depress their share prices. This does not mean that you should sell. You could take advantage and increase your portfolio at a bargain,” says Ochieng’.
There are times when you will make the mistake of buying a bad stock. This will be more likely if you are a newbie in the securities market or if your stockbroker gave you the wrong investment opinion. “You should seriously consider selling if it turns out your rationale for buying the stock was flawed, if your valuation was too optimistic, or if you underestimated the risks,” says Ochieng’. BY DAILY NATION
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