What is the Right Price for a Stock?


Dear SmallIvy,

I’m looking to buy a stock I’ve been watching but don’t know when.  What is the right price for a stock?

Regards,

Jerry

Dear Jerry,

Ask SmallIvy

Fortunately, because of the auction system used for stock trading,  the stock price will always be right, in that it will always reflect all current and past news, along with people’s expectations of what the company will do in the future.  There will also be a risk premium priced in to account for the risk that the company may not make the earnings that are projected. 

In the short-term, however, there are also seemingly random fluctuations that are due to various trading schemes people are using and just general anxiety or exuberance people feel at the current time about the stock.  This means that a stock may be over or under priced for short periods of time (a few hours to maybe a few weeks).

One good measure is to look at the current PE as compared with the PE range over which the stock has traded in the past.  If earnings are expected to grow at their historic rate the PE should be around the center of the historic range.  If earnings are growing faster than normal it may be near the top of the range and vice versa.

Another trick is to wait for one or two days of declines in price before buying a stock.  The stock may well move up or down just because the whole market is moving; therefore, you may be able to get a bit fo a discount on the price by waiting for the market to decline.

Note however that if you are using the strategy of this blog and investing for the long-term, the dollar or two you may get from timing the buy really won’t matter much.

SmallIvy

To ask a question, email  vtsioriginal@yahoo.com or leave the question in a comment.

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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