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Under Priced Stocks

The whole point of investing in stock is finding under priced stocks. Through technical and fundamental analysis investors and traders look for stocks that are worth less today than they will be a decade from now, next year, tomorrow, an hour for now or in five minutes. The time frame depends, obviously, on whether the game is long term investing or short term trading. There are two ways to identify under priced stocks. For the longer term it is necessary to do fundamental analysis of a company’s prospects, its cash flow ratios, the efficiency of its operation, its product line, and to compare stock earnings to stock price. This last, the price to earnings ratio is a time honored way to spot under priced stocks. The other way and for shorter time frames is to look at technical analysis of the stock price history. Going back centuries to rice trading in ancient Japan a technique called Candlestick analysis used past market data to predict future market performance. Candlestick basics work today to help find underpriced stocks just well as they did to predict the rice market centuries ago.

Prediction and Profits

The same techniques that work to find under priced stocks work for buying stock and selling stock and for buying calls or puts and selling calls or puts in options trading. The point is to be able to accurately predict where a stock price is going. In general the longer out an investor wants to predict a stock price the more he or she will rely on fundamentals of the company, market sectors, and the economy. Knowledge of technology, governmental regulation, and the like all come into play when predicting long term stock prices. For predicting shorter term price moves smart traders rely on the fact that markets repeat themselves. Thus there are stock price patterns such as Candlestick pattern formations that will reliably predict the continuance of price trends as well as market reversal.

Buy and Hold versus Buy and Sell

What folks do with underpriced stocks after they buy them depends upon whether they are long term investors or traders. The long term investor buys cheap stocks and revels in the fact that he or she is now getting 4% dividends on stocks that are three times the price at which they were purchased. It makes the investor happy to be getting a 12% return on investment. In short term investment one will buy low and sell when the price of the stock peaks. Then the investor or trader will use the profits to buy other under priced stocks and repeat the process. When the next stock market crash comes the trader will more likely see it coming and will short sell and make money on the way down while the long term investor may just rationalize that even if the stock is only worth half as much as yesterday it is still worth a lot more than when he or she bought it. The savvy trader just counts his or her money and moves on to the next trade.

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