When should you buy?

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A couple of days ago, a friend of mine told me he wanted to buy some Alitalia shares, because “they couldn’t go lower than this“. I hope he didn’t buy anything, since after this Alitalia shares went down nearly 8%. I think his experience gives us a hint to talk about “when you should buy shares on the stock market“.

One of the biggest mistake that one can make is in evaluating if a share is at a good price (and therefore it’s a good deal to buy) or it isn’t. Stock quote is surely one of the elements you should consider, but it’s far to be the only one: to think that a security can be convenient only because it’s price is lower than before, can be plain financial suicide.The most important element it’s the growth outlook, i.e. if my investment is likely to increase its value, and if this possible increase is adequate to the risk.

What we are saying is very clear if you consider the shares for what they are – property shares, which when you buy them, you buy a little part of the company you’re investing in. Would you really buy a company on the edge of bankruptcy, because “the company has already lost a lot of money”? I bet not.

Rather, it would be different if the question was “Look, there’s this company that now is in difficulties, but we have this and that idea, so it will make huge profits in future. Do you want to buy it?“. But if you think a little, in this case the important part is “huge profits in future”, more than “now is in difficulties”.

One other thing that newbies in the stock market sometimes seems to forget when monitoring stock quotes, it that you need to consider price variations in percentage terms. If a stock that yesterday was quoted 100, today is quoted 10, this in no way reduces risk: if you buy and tomorrow quotation is 9, you lose 10% of what you invested, surely not the 1% one may think looking at yesterday price. This is quite a trivial remark, but it happens more often than one think that people do calcluation taking wrong references.

Italian translation of this post: Quando si compra?

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