Investors who follow the financial markets on a daily basis sometimes feel, especially when the markets are going through a bad roller coaster ride, it will never end. If the global economy is struggling to maintain its health, matters become more difficult. In such circumstances, which stock should you buy? Sometimes, investors are confused as to whether they should keep their money safe or buy stocks at lower costs. The aim of this post is to give investors some idea as to what they could do under such situations and what stock market basics they should keep in mind when looking to buy stocks.
Things to Keep In Mind
Markets can go up and go down. This has happened many times and this will continue to happen. It is stressful for investors to see their portfolio going down, but it should be noted that during the period from January 2, 2009 to December 31, 2015 the market rose 128.01 percent. As it is difficult for anyone to predict as regards the direction of the market, timing the market is not a good strategy to follow. Instead, investors could allocate a part of their portfolio to index funds. This is because they allow investors to benefit from dollar-cost averaging.
That said, minimizing the losses is by far the best way of growing a portfolio. The reason is it is difficult to even out after incurring a loss. Therefore, it is important to know as to what investors should watch for when the markets are not doing too well. This will enable them to try and minimize their losses.
If there is volatility in the market and it is likely to remain for a while, there could be a number of reasons for that. Some of them could be as follows:
The news coming out may be mixed. When one stock is announcing great earnings, another one may be announcing terrible earnings. Some of the big economies and the oil industry may be reporting not-so-encouraging news, but the jobs and housing market may be showing a reasonable amount of strength.
Though the interest rates might have been raised after a long time, yield seekers may not have found the raise satisfying. Investors looking to earn more profits from their portfolios often turn to stocks that offer higher dividends than what they could earn by investing in bonds. The chase for better yield will drive the prices of solid company stock higher. This is to say that investors may find the stocks to be unreasonably priced even though the market is generally moving southward.
Many investors who have had bad experiences during stock market crashes in the past move out of stocks when bad news start to flow in. This because they do not want to suffer the large losses they had previously experienced, especially if the they are close to retirement. Investors who are looking for yield and those that do not have any control over their emotions would drive the markets up and down till such time the growth becomes stable once again.
When companies find it difficult to grow earnings by way of organic growth, they look at other ways of increasing their earnings. They may even try to make it seem as though they are earning more profits. First of all, they try to lower their expenditure by cutting the internal costs. As the next step, they scout for mergers and acquisitions in order to increase their revenues. Finally, they implement some of the financial engineering strategies like the share buybacks.
If companies resort to measures like these in order to increase their earnings, investors should be extra careful when analyzing a stock. Therefore, it is important to ensure that the company investors want to own is a solid one. Some amount of research is essential to ensure this.
Cash vs. Stocks
The question now is whether investors should keep their money in savings accounts because of the above mentioned factors or whether they should park their funds in stocks of solid companies? The answer is investors should find answers to the following questions prior to buying stocks of solid companies. These questions can be used as a guideline to move out of cash.
#1: Are profits growing or stable?
Many investors may think that gas companies are a great buy, especially under the current circumstances. This is because their prices have fallen a great deal. However, what they must realize is that the markets are not going to stabilize anytime soon. On the other hand, a company’s stock may be trading lower because the markets are down, but the company may still be growing and may remain fundamentally strong. If this is the case, then it might be worthwhile to move some amount of money from cash to stock.
#2: Are dividends stable?
Dividends constitute a large part of the total returns that investors get from the stocks they hold. If a company’s dividends are stable with a low dividend payout ratio, then investors can consider buying stocks of that company. This is because investors could get returns from the dividend even if the stock’s price does not move up.
#3: Can I hold a stock for a minimum of five years even if the stock market declines? In other words, will the business see through a downturn? Will the company continue to remain healthy after the downturn?
If a stock fails to satisfy two of the questions discussed above, it is better that the investor leaves the money in the savings account and continues to look for solid companies that would satisfy these requirements.
When the markets are struggling, if investors keep all the cash they have in their accounts, they might miss out on some of the good buys. Actually, they should take some time off and understand as to why stocks of some of the solid companies are reacting to the market conditions and check whether they are fundamentally stable. After satisfying themselves as regards the price behavior of the stocks of these companies, they can consider buying them when the price touches the price targeted by them.