Written by Norman Isaac Mwambazi

Key factors that help investors and brokers decide when to buy, hold or sell stock

Prices of stocks on the stock market are continuously changing and traders, investors and brokers alike have to make fast …

Prices of stocks on the stock market are continuously changing and traders, investors and brokers alike have to make fast decisions about which kind of stock to buy, sell or hold, and when to do so. All players in the trade have key indictors or factors they focus on that help them make decisions under the pressure of not missing profitable opportunities.

Here are some of those important factors to consider

Increasing sales

This one of the most important things to check and while you are at it, check to see if this sales growth is sustainable or it is just related to a one-time event. You will need to check what that company’s management is talking about the quarterly sales results. Management’s comments and the company’s number of sales will indicate either that the company’s sales grew or it was a windfall.  

Industry experts predict that smaller companies in the $100 million to $1 billion sales range should be growing at a rate of more than 10% annually whereas larger companies should be growing by at least 3% per annum to be of interest to invest in.

When looking at a company’s sales growth, compare its figures from the last quarter and those from the last year. There is a good sign if quarterly sales showed an upward trend. Company press releases and quarterly profit reports provide great insight into the value of that company’s stock and they can help you make decisions on whether to buy or not.

Improving margins

A margin in business terms is the ratio of a company’s profits to its cost incurred in a given period. When a company releases quarterly reports with improving margins, this is a good sign that the company’s management is doing a good job, and deteriorating margins indicate management is not doing well enough.

However, a company’s rising costs may not necessarily indicate bad management, as the company might be expanding its business operations or preparing to launch a new product, which makes its cost shoot. These costs will be compensated for in the future after the new product is launched or when new business expansions catch up.  

Improving margins is usually a sign that a company is well managed, but do not automatically dismiss a firm with deteriorating margins, as it could reflect that the company is launching a new product or expanding.

In-depth analysis of these margins will help you decide whether to buy stock from this company, sell, or hold.

Guidance on future earnings

Companies provide Wall Street with important guidance on future earnings through their press releases and quarterly reports, and the investor needs to pay attention to how Wall Street reacts to this guidance.

This guidance for the next quarter may be better or worse than what Wall Street analysts are expecting and it has the power to either increase or lower the stock price at least short-term.

The psychology behind company earnings guidance is that if a company raises its guidance for the current quarter but downplays expectations beyond that, the stock will probably sell-off. If a company downplays its estimates for the current quarter but raises its full-year estimate, then the stock will probably take off.

Whatever the earning guidance shows, it is better to focus on long term prospects because Wall Street experts usually ignore a short-term mishap in the market if it is convinced that there is an upwards catalyst on the horizon.

Stock buyback programs

In stock trading, it is common practice for a company to buy back its stock from the market. When this happens, it shows that the company believes its stock’s intrinsic value is higher than its current market value, which is a good buy signal for investors. Companies mention their plans to buy back their stock in their press releases.

Other reasons why a company may decide to buy back its stock is when it wants to reduce the number of shares in the public domain. Buying back stock improves the company’s financial ratios and boosts its earnings, which makes it look attractive to stock analysts by thinking its stock is worth more.

For traders, a company buying back its stock signals better earnings because the company will pay out higher dividends to fewer shareholders. On the contrary, the more shares there are in the public domain, the lower the profits for shareholders because the company has to spread earnings among a larger pool of investors.

New products

Stockbrokers and investors put much interest in a company that is about to launch a new product even though they cannot accurately predict how the new product will fare on the market. Nevertheless, new product releases tend to move the share price of companies launching them higher due to the companies’ promotion of the new product, its price, and the revenue it is expected to bring to the company.

For example, the share price of Samsung will most likely rise in the weeks leading to the official release date of their next high-end device in the Galaxy series. The hype and adverts that surround it will drive Samsung’s share price higher as investors rush to get a share of what Samsung anticipates to earn off the sale of that handset.

It is worth noting that it is not always automatic that companies always smile to the bank after launching a new product but the profits are staggering when the product gets widely accepted by consumers.

The subtleties of the language used

When a company releases a press release about the company’s performance in the last quarter and what they expect to earn in the future (we talked about this in earnings guidance), it is as important to pay attention to the language and tone used in the press release as the numbers presented.

There are sales figures showing growth, expected earnings, new product releases, expansion of business operations and acquisitions but pay attention to how the press release is delivered, in terms of tone and language.

The language used in these press releases is very deliberate because before they are released to the public, the company’s public relations and legal departments have to keenly review them. A cheerful report is especially a good sign to investors, whereas a report containing muted language should be viewed with suspicion.

Although that is the case, caution should be taken towards overly cheerful reports, especially when a company does not deliver what it previously promised. The stock value for such a company is likely to downturn no matter what management says.

Technical indicators

So you have followed companies launching new products, you have seen their increasing sales; you have identified those that are buying back their stock. Now, let us go technical. This involves looking at the company’s stock chart from last year to about the last five years to find relationships in the way its stock trades.

Look out for similar seasons when the company’s stock trades higher or lower. Check out the volume of stocks being traded in a certain period, and find out whether the volume of stocks traded has increased or decreased.

When the volume of a company’s stock traded decreases, it means traders are becoming less interested in its stock, which may lead to a fall in its price. This is caused by many factors like the company losing its competitive advantage to competitors, poor management among others.

On the other hand, if the volume of the company’s shares traded increases, this inevitably increases its price and it is a good sign for traders to either buy or sale shares in that company. An increase in a company’s volume of shares traded is a result of good management, growth opportunities, market leadership among others.

The general view

When making important decisions like choosing what type of stock to buy, sell, or hold in what company and when to do that, the key factors discussed above should be accompanied with understanding the underlying fundamental and technical factors that may affect the value of stock both in the short and long term.

Fundamental analysis, where the stockbroker, investor or analyst studies the entire state of the economy, the industry performance and then delves into the company’s management and how it treats its shareholders, may be needed before a decision is made.

Incorporating this with the technical analysis of examining historical data about stock prices and volume traded at a particular period helps the trader or investor make better decisions. Things like interest rates, taxes, or consumer behaviour may also have an impact on the stock by either driving the prices up or down.

Conclusion

In summary, investors and stockbrokers take their time to study and understand the market before making decisions on buying, selling or holding stocks. They know that they are in the market to make profits so all the decisions they make are intended to achieve those results. Buying low and selling high, selling when there is a downturn, holding when stocks are stable, buying from companies that show potential for growth, among others. All those decisions come after putting into consideration the factors discussed above.