The ideas in this article are purely based on my experiences. Investment in stock markets is risky and individuals should do their own careful due diligence and research before investing.
Looking back on the stock price trends everybody ponders about the money that one could have made had one bought the stock in its lows and sold it in its highs. The catch is that how to forecast when are the lows and when are the highs. This is the toughest call to make because stock markets work on the theory of expectancy, which is what a group of investors in the market expect based on the publicly avilable news.
Hence in order to beat the market one needs to be able to understand what others would expect for a stock or company based on the news available on the day and then act accordingly. This is more important if one wants to make money in stock markets in the short term. However the safer and easier bet is to enter the market at the lows, wait for a while say a year or so and then exit the market when the market is in its highs. This theory would work only for good blue chip stocks because weaker stocks or company’s can do very poorly even when the markets are very high.
Such long term (over 1 year) investment in the stock market always works well because the one most predictable phenomenon of stock market is that it is always cyclical. What comes down always goes up and the cycle continues. Also there is a pattern to the frequency of stock market cycles. The market underwent dips in 1987, 1990, 1994, 1996, 1998, 2001-2002, 2008. Thus the trend is that generally markets always go down once every two to three years followed by one to two years of increasing trend. Now one way to guage whether the market has really got to its bottom or not is to verify what was the quantum of fall in DOW index when the last time market came down. If current fall of DOW is of the similar order as compared to the last fall then one can make a call that the market has reached its bottom and then enter good blue chip stocks, wait for 1.5 to 2 years and then sell it. Once out of the market then wait for the next dip in the market to re-enter the market again. This strategy seems to work well in the long run.
If one wants to try making short term gains with predictability then below are few ways to forecast when stock prices are going to dip, buy them at those dips and then sell them as soon as they rise (point to remember is that whatever falls does ultimately rise).
- Stocks which pay out dividend always have a drop in their share price on the dividend ex-date (dividend ex-date of stocks are available at www.mworld.com. However buying on the dividend ex-date implies that one does not get the dividend but one can capitalize on the price drop to make capital gains in future. The quantum of drop in price on ex-date of dividend depends on the quantum of the dividend amont and number of outstanding shares in the market.
- Stocks which offer options have their option expiry date once every month (which repeats every 4th week). This option expiry date of a stock is available on yahoo finance. Generally in the week of option expiry every stock undergoes a dip (due to exercise of options) which is another opportunity to buy at a dip.
- Some stocks undergo substantial drop in price beyond 10% on certain day at times. This happen post quarterly results if the earnings, revenue growth, future forecasts are below market expectations or if there is some news in the market forecasting on upcoming results. Whenever such a scenario occurs, then one should quickly read the latest news of the stock to understand what is the cause for the dip and if one can make sense of the cause then buy at the dip or take a judgement call to wait for a day or two for the price to fall further and make a buy.