When To Buy Shares
Choosing the right time to make an investment in the stock market is ultimately a very personal decision and will be determined by your investment aims and the risks you're willing to take. As with any sort of financial gamble there are many different theories and strategies - some of which are closely guarded - and what works for one investor may be completely wrong for another. This is the nature of the stock market.
Initial Public Offerings
One of the most common investment strategies that both new and seasoned investors rely upon is the purchasing of shares in companies that have just been listed on the market. This occurs when the company publishes an Initial Public Offering (IPO). The company will release a brochure for potential investors that explains the background of the company, their policies, ethics and aims, and their development intentions. The company will use public interest and the state of the stock market at the time of the IPO to determine their initial share price, though this often changes prior to the date the company becomes listed and will fluctuate in the weeks after the listing.
Although it is true that some companies become listed out of financial necessity - they may be running low on capital or need to be listed in order to stay afloat - many successful and profitable companies also choose to become public in order to raise funds for large development projects. This is when investing in an Initial Public Offering is a good idea, as the stocks are likely – though not guaranteed - to hold their value and perhaps increase over time.
Buying After Rapid falls In Value
Another common investment strategy which is arguably far more riskier is the investment in shares that have rapidly decreased in value over a short space of time, possibly because of an industrial or environmental issue. This is a much more dangerous investment method because stocks that decrease in value dramatically are not guaranteed to bounce back. The belief that investors have in such a strategy is that if the right company is chosen (research is crucial), the shares will be purchased at their lowest possible price before bouncing back to their pre-fall value, at which point they can be sold for a profit. The critical point of such a strategy is knowing enough about the company and the industry it operates in to make an educated decision about the likelihood of its stock value increasing.
Value Investing Technique
Interestingly, when the investment strategies of some of the world's most successful investors are analysed, the emphasis is on caution, frugality and most importantly a thorough understanding of the industry the stocks are relevant to. Warren Buffett, one of the world's richest men, and Joel Greenblatt, a prominent investment author, use the value investing technique when trading on the stock market. The value investing technique essentially involves investing in stocks which are on the market at a price lower than their intrinsic value, perhaps after a less than satisfactory profit announcement or as a result of industry decline.
This strategy, of course, involves a huge amount of background research and also a feeling for wider market trends and external factors: many investors have tried to use the same techniques as Warren Buffett and been nowhere near as successful. A deep knowledge of the company and sector and effective research are essential: a company that appears undervalued to one investor may seem like a dangerous risk to another. Only by researching in as much depth as possible can an investor hope to come close to a reasonable judgement.