The term “buy stock” usually indicates a particular type of stock or share in a company that is recommended by analysts and other investors to buy or own because of its higher potential for price appreciation in the future. A “sell stock” is the opposite and it comes with a recommendation to sell or dispose because of its higher possibility of price depreciation.
Understanding Buy Stocks and Sell Stocks: Knowing the General Characteristics of Stocks With Higher Chances of Either Price Appreciation or Price Depreciation
There are investors and traders, including fund managers, who determine for themselves whether to purchase and hold stocks or dispose of what they already own and hold. However, in several cases, especially for inexperienced investors and traders or for those who do not have the time, their stock investing decisions are generally influenced either by definitive buy signals and sell signals or recommendations from financial advisors and other investors.
A specific “buy” or “sell” designation is a result of either a combination of fundamental analysis and technical analysis. However, in consideration of due diligence, it is important to underscore the fact that it is still better for investors and traders to have a foundational understanding of what makes a stock either a buy stock or a sell stock instead of depending solely on the recommendations of advisors or copying the trading patterns of other investors.
Characteristics of a Buy Stock
Stocks with the potential to increase their value or for price appreciation often feature a set of characteristics. These include patterns in their historical performance, good financial performance of the companies, new or highly-anticipated upcoming product launches, growth in the specific industry or sector and market, and positive economic outlook. The following are the general characteristics of a buy stock:
• Bullish Price Movement Patterns: Technical analysts refer to established bullish patterns in the historical price movement of a particular stock to predict its future price movements. These include an ascending triangular pattern characterized by a sustained price increase within a channel with an upward slope, and a bullish pennant which is characterized by an uptrend with price consolidation in a triangular pattern.
• Favorable Financial Performance: Another characteristic of a buy stock is its positive financial performance as indicated by stable or increasing earnings, double-digit profit margin, decreasing liabilities, investments in business expansion or research and development, and other favorable financial ratios like low debt-to-equity ratio, a current ratio of around one, and high inventory turnover ratio.
• Strong Industry or Market Position: The competitive position of a particular company in its industry or market is also an indicator of the possible future performance of its stock. There are several examples. Apple has maintained a dominant position in the smartphone and tablet markets. Nvidia has dominated the graphics processor market and is an important player in database and artificial intelligence markets.
• Valuable Competitive Advantage: A company with a unique set of advantages that set it apart from its competitors and enable it to deliver differentiating goods or services often performs well in terms of sales, earnings, and profits. There are different sources of competitive advantage. These include a unique business model, strong brand equity, technologies, strong economic moat, and personnel.
• Strong Industry and Market Growth: Both the industry or market position and competitive advantage of a particular company are complemented by strong prospects of industry and market growth. One of the key characteristics of a buy stock is that the issuing company should be offering products with differentiating qualities and good market fit in a particular market with a strong potential for further growth.
• Trend-Aligned News and Publicity: There are developments in current affairs that affect the attractiveness and growth prospects of involved companies. Nvidia has become more attractive in 2022 due to the artificial intelligence revolution. Pfizer and Moderna attracted investors with news following the release of vaccines against the coronavirus. Zoom performed well during widespread lockdowns.
• Defensive Stock and Cyclical Stock: It is also worth that a defensive stock or cyclical stock designation can also be a characteristic of a buy stock. Defensive stocks are stable even during economic downturns or market uncertainties. Several cyclical stocks are attractive during economic downturns or market uncertainties because of their potential for price appreciation once the economy or market rebounds.
Characteristics of a Sell Stock
Stocks with a higher likelihood of decreasing their value or for price depreciation also often feature a set of characteristics. These also include patterns in their historical performance, as well as poor financial performance of the issuing companies, negative news or bad publicity, decline in the specific industry or shrinkage in the market, and negative economic outlook. Below are the general characteristics of a sell stock:
• Bearish Price Movement Patterns: Technical analysts also refer to bearish patterns in the historical price movement of a stock to predict its future price movement. These include a descending triangle pattern marked by a sustained price decrease within a channel with a downward slope, and head and shoulders patterns marked by a head with two lower shoulders that indicate potential for post-peak decline.
• Unfavorable Financial Performance: Another characteristic of a sell stock is its negative financial performance. This is indicated by stagnant or decreasing earnings, single-digit to zero profit margin or losses, increasing liabilities, reduced or inexistent expenditures for business expansion, and unfavorable financial ratios like high debt-to-equity ratio, a current ratio of below one, and low inventory turnover ratio.
• High and Unsustainable Debt Level: Furthermore, related to its financial performance, a company with an excessive level of debt and a low level of earnings is unsuitable. This is an indicator of increased financial risk that makes it more vulnerable to sudden and short-lived economic downturns, reduced or absent profits available to shareholders due to debt payments, and a high potential for insolvency.
• Undifferentiated Value Proposition: There are companies operating in saturated markets or niche markets but do not offer differentiating products nor have unique value propositions to offer their target customers, and have weak to zero competitive advantage. These companies are not attractive to invest in because of their limited growth potential relative to their high-performing competitors.
• Matured or Static Industry or Market: A company that operates in a market with a low level of growth potential might also be not attractive to invest in despite having a strong value proposition and competitive advantage. Stagnant markets are often on the path of decline, and the companies operating therein have long been unqualified as growth or value stocks and unsuitable for growth or value investing.
• High-Impact and Unfavorable Publicity: Take note that news can shape the sentiments of investors and the public. Those that provide companies with unfavorable publicity tend to have a direct and immediate effect on stock prices. Examples include corporate scandals, news, and even rumors about liquidity capabilities, internal management issues, downsizing or layoffs, and negative product reviews.
• Current or Potential Regulatory Issues: Another indicator or characteristic of a sell stock is if the issuing company operates in a setting with restrictive regulations. The regulatory environment can negatively impact its specific product or its entire business model. There are investors who also do not respond well to current or potential regulatory challenges faced by companies. This is similar to bad publicity.
Takeaways and Pointers on the Characteristics of Buy Stock and Sell Stock: Importance of Performing Due Diligence Before Deciding Which Stocks to Buy and Sell
It is imperative to underscore the fact that both the aforementioned characteristics of a sell stock and the characteristics of a buy stock are general guidelines. They are not fool-proof and absolute indicators for deciding which stocks to buy and which ones from an existing portfolio to sell. There are different sources of buy signals and sell signals. There are also different approaches. It is important for investors or traders to perform due diligence either through fundamental analysis, technical analysis, or a combination of both. Furthermore, considering that the purpose of investing varies from person to person, an investor or trader should also base the characteristics of a buy stock and sell stock on his or her specific goals and objectives.
