For long term investment, an investor should buy stock at discounted price. Buying stock at discounted price for long term investment is a crucial factor.
Trading stock and investing stock are opposite by nature. Moreover, trading and investing are two different concepts.
Traders trade stock for short-term return. On the other hand, investors hold stock for long-term return. Investors stock buying strategies are different from traders stock buying strategies.
What is long-term stock investment buying time?
Investment means achieving any asset, which gives either short term return or long-term return. Investing in stock means buying equity which gives short term capital gain or capital loss and dividend in the long run.
Thus, long term investment means holding any asset for long term return. Long term investors always try to buy stock at cheap rate.
Generally, long term stock investors hold stock for many years for dividend gain and capital gain. Hence, long term stock buying techniques are different.
Who are the buyers of stock for the long-term investing?
In most cases, long term investors are passive investors. They have less time to follow up the market each day. Long term investors prefer to invest in stock because investing in stock is more profitable than investing in fixed deposit scheme.
They wait for perfect stock buying time. Long term investors have comparatively less stock investing ideas than stock traders. Now you may ask,
What is the strategy for picking long term investing stock?
There is a widely used strategy for picking investing stock. You may hear the name of Benjamin Graham. He wrote one of the best stock investing books—”The Intelligent Investor”.
In his book, he emphasized on discounted price while buying stock for long term investment. Warrant Buffet, who is one of the best stock investors. He also proved Benjamin Graham’s strategy.
Warrant Buffet picked temporally undervalued stock. His buying strategies are followed by many long term investors. Moreover, he made his luck by picking the best company’s stock at undervalued price.
Still now, discounted price for good company’s stock is the best buying strategy for long term investment.
Does it possible to buy stock discounted price every time?
Discounted price is not available every now and then. In order to buy under price stock, an investor has to wait years after years. Yet, this opportunity may come or may not come. Let’s talk about a chance.
Real Example
Covid-19 virus expanded across the world in 2020. People have no past idea about this virus. Almost all countries’ people were affected.
Most of the countries’ government enforced lockdown to control the situation. Like other organizations, companies had to shut down. As a result, all companies’ share price lost market value.
40 dollars share price declined to 10 dollars or 5 dollars. Generally, good companies share price also declined dramatically in downtrend market.
In the outset of 2021, companies started to resume their operation and stock price again touched earlier price or more. If an investor bought stock at the beginning of pandemic, he could buy at discounted price.
You may buy a good stock at discounted price if
- A good company temporally faces business crisis.
- Any price sensitive agreement expired
- Unexpected loss for any reason
- Temporary reputation loss
- New project failure
- Excessive selling pressure
Before putting buying order, you should ensure that this crisis will recover within a short term. You should wait for chance. Best opportunity doesn’t come easily.
What are some other factors needed to consider for stock buying decision?
EPS, Dividend Yield and P/E ratio are three main indicators to know the strength of your selected company. Hence, you make sure that your selected company has fulfilled these indicators. Learn about EPS for long term investment.
Earning Per Share (EPS) for buying stock
- Earning Per Share (EPS) is calculated by net profit divided by the number of shares outstanding. You must consider net profit. You should choose high EPS companies. Sustainable EPS for every year must be taken into consideration.
Dividend Yield
2. Dividend Yield is the best indicator for long term investing. At first, you have to ensure net profit. Later, you should consider how much earning a company shares with investors.
If your selected company provides high dividend yield, you can choose the company. Suppose, a company’s share face value is 10 dollars. Market Value is 40 dollars (You bought at 40 dollars).
And cash dividend rate is 30%. What is dividend yield? Dividend Yield is 7.5% (10*30%)/40. So, you should choose high dividend yield stock.
Price to earnings (P/E) ratio for buying stock
3. Price to earnings (P/E) ratio is another important indicator, which implies how much your company needs to invest for a single dollar earning.
If P/E ratio is 20 dollars, company can earn 1 dollar by 20 dollars investment. Therefore, the smaller the P/E ratio, the better to invest in this stock.
Suppose, a company’s EPS is 5 dollars and market value per share is 30 dollars. P/E ratio is 30/5=6 dollars.
Moreover, in order to know the company’s own capital strength, you should need to analysis Net asset value per share (NAV). And debt to capital ratio.
NAV indicates net asset value per share. The higher the NAV, the better chance for company’s sustainability.
Debt to equity ratio indicates total third party’s debt to company’s own capital. Low debt ratio indicates that company may survive without debt with its own capital.
In Short
Company’s financial health is the main factor to consider for long term investment. Therefore, you should invest in well- established company, which gives a sustainable dividend each year.
A good earning company may face temporary crisis. In the long run, it will recover its position. Just try to buy discounted price.
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