How do you know when a stock is priced low?

stocks on sale

Reading time: 3 minutes

Stock prices go up and down all the time. Everyone has heard the phrase "buy low and sell high". How do you know when a stock is priced low (on sale), and why should you "buy low"?

stocks on saleHow do you know when a stock is priced low?
I've created a short video that shows you how to quickly determine when a stock is priced low (undervalued). You can watch the video here on my Youtube Channel.

Why should you buy low?
Let's say a stock is priced low at $15 and priced high at $65. It's doesn't make sense to pay $62, $65, or $70 for this stock, it is already overvalued. If you can buy this stock at around $15, you will be able to maximize your profit by potentially selling the stock when it becomes overvalued.

Avoid buying overvalued stocks
When the stock market is up, stock prices are also up. High prices might be good for selling and taking a profit, but bad for buying. You, the investor should focus on buying stocks when they are priced low (undervalued).

Avoid the temptation of high dividend yields, or hot stock stories in the news, if a stock is overvalued you need to avoid it. Have a look at two stocks below and see the difference in returns in just a few years:

The J. M. Smucker Company (SJM), was overvalued in April 2016
Caterpillar Inc. (CAT), was undervalued in April 2016

Company
Price in April 2016
 Price in Sept 2021
Return
SJM
$132.52
$121.77
-8.11%
CAT
$76.79
$204.41
166.20%


All things considered equal, you can see that an investment in CAT would have been the better choice. SJM declined in value during the same period. There is very little potential for an overvalued stock to go up in value because it is already priced too high.

As shown in my video, remember a stock is undervalued when it’s current dividend yield is higher than its average dividend yield.  Your focus as always should be on acquiring quality dividend paying stocks when they are undervalued.

I'm here to help
I can help you to start investing today, why re-invent the wheel when you can learn from my 20-years of being in the stock market. I've witnessed first hand the ups and downs of the market, and I know what it's like to start investing your hard earned money. I created the 12 Rule of Simply Investing to help you get started right away, so you don't have to wait on the sidelines any longer. The sooner you start investing the sooner you will be on your path to financial freedom.

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Learn how you can avoid the most common (and costly) investing mistakes, download my free guide today: "Are you making these top 5 investing mistakes?"
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3 comments

Nice one sir, Simple and educating

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I have added you to my learning journey in investing (financially independent), I am a student at NAIT (Edmonton) hoping you could be part of our financial literacy program. Thanks

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Kanwal Sarai Staff

I'd be more than happy to be a part of your financial literacy program. Please use my contact page to get in touch with me.

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