When To Buy And Sell

| Total Words: 462

The mechanism of buying and selling is quite easy. It is as easy as pressing a button in front of your computer screen. The question of when investors should buy and sell warrant a more detailed analysis.

When to sell: Ideally, we should sell when a stock reaches its fair value. There are 9 other reasons to sell but I won’t cover it here. So, what is a stock’s fair value? I have covered this plenty of time. But, in general, a stock reaches its fair value when it is yielding 3% above the current free risk interest rate. I am using 10 year treasury bond as a proxy for free risk interest rate. Currently, the 10 year bond is yielding 4.46%. Fair value of a stock is therefore when it is yielding 7.46%. Inverting yield, we then got the widely used Price Earning Ratio. Yield of 7.46% corresponds to P/E ratio of 13.4

When to buy: This is an easier question to answer. We, of course, should buy stock lower than we sell. If we sell the stock at a P/E ratio of 13.4, then we should buy it when the P/E ratio is less than 13.4. How much lower ? It depends on how much return you aim for. If, say, you are aiming for 50% return, then your buying price is...

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