Just like poker, knowing when to hold’em and when to fold’em can be the key to a winning hand or going bust.
Often you’ll run into analysts who place a buy, sell, or hold recommendation on a particular stock.
The reasons for their recommendations are varied, and they have to do with particular company news, sector-wide news, or thoughts about the economy as a whole.
The below isn’t a comprehensive list of things that can trigger a buy, sell, or hold recommendation (and this article certainly isn’t a recommendation) — but hopefully it helps better understand the forces underpinning them.
When to buy
Things that can trigger a buy recommendation are varied, but generally speaking they can be broken down into two themes: company news and news impacting the sector.
This is something that the company has done which is read as a positive for its fortunes in either the short-term or the long term.
For example, a gold miner may do some drilling and come back with high-grade hits — above what the market may have been expecting of that drilling.
Meanwhile, a company may release guidance which points to a positive future. Statements like ‘we expect Q3 revenue to be substantially higher year on year’ for instance may get investors excited, and therefore buying up shares.
An analyst may also release a glowing report or a news outlet may provide positive coverage, triggering a buying event.
Of course, a company’s shares can go up for reasons completely outside of the company’s influence.
For example, if the price of gold spikes the shares in a gold mining company may also go up as investors look for as much exposure to gold as they can get.
In the same vein, analysts may start producing reports indicating that they like mining stocks as a whole over the next year, triggering investment in mining companies across the board.
When you think one of these events may trigger a price movement upward, it could be time to buy.
When to sell
Again, the reasons to sell can almost be cast as the exact opposite of reasons to buy.
If a company does something which is below shareholder expectations, then it may be punished with a sell-off.
In the case of the gold miner, not hitting any gold during a drilling program may be disappointing to investors who had expectations of big hits. If you think that’s the case, it could be time to sell.
Similarly, if a company misses revenue guidance or a key executive goes through a PR firestorm it could be time to place the sell orders.
Again, there are a whole stack of reasons that may cause a stock to slide.
A company’s underlying commodity may be in the doldrums, or the economy of key customers may be going down as well.
For example, if there’s negative news on China’s economy you may find the price of iron ore goes down — as investors expect that this will impact on building activity in China, and therefore demand for steel.
Movement in currency can also affect earnings either way. If the currency its paid in by customers is different from the currency it ultimately books profit in, this can happen.
For example, if a company’s customers settle up in USD but the company books revenue in AUD, it will be negatively affected if the AUD strengthens against the USD. Again, this is out of the company’s control (unless it has hedging in play).
When to hold
This one is pretty simple.
If you think a company has potential over the long term or you simply don’t know which way a stock may go, it may be in an investors interest to hold. Or in other words – to wait and see.
Holding, or ‘going long’ is often a strategy employed by investors in stable, long term companies.
They may not have the scope to go up or down by double-digit percentages on a single piece of news, but they are good bets for people looking to park their money in equities without the volatility.
Again, this isn’t intended as a comprehensive investment guide — just a few thought-starters on when you should buy, sell, or hold.
This content does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
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