Key Factors on Buying or Selling Stocks

The most successful stock investors follow basic rules to make trading decisions.

Comstock/Comstock/Getty Images

It is difficult to accumulate enough money to invest in the stock market, but when you do, you are faced with another difficulty -- deciding which stocks to buy. And once you own stocks, you have another difficult decision: when to sell them. Nobody knows for sure when to buy and when to sell, but a few investors prove their skills over time and become icons of stock investing. Their advice is worth adding to your investing tool kit.

Know Your Reasons

Never buy or sell stock on a whim, or on a tip from one of your friends or a media pundit. One of the most important elements of successful stock trading is knowing the underlying company well enough to decide whether its stock is a good investment, and to realize when it becomes a bad investment. This means doing research before you buy the stock, and monitoring its performance while you own it.

Walter Schloss

One of the most famous stock investors was Walter Schloss, who in 1994 left 16 rules as a legacy to investors. On when to buy: "When buying a stock, I find it helpful to buy near the low of the past few years. A stock may go as high as 125 and then decline to 60 and you think it attractive. Three years before the stock sold at 20, which shows that there is some vulnerability in it." Regarding when to sell, he warned: "Don’t be in too much of a hurry to sell. If the stock reaches a price that you think is a fair one, then you can sell, but often because a stock goes up say 50 percent, people say sell it and button up your profit. Before selling, try to re-evaluate the company again and see where the stock sells in relation to its book value."

Warren Buffett

Another legendary investor, Warren Buffett, approaches stock investing decisions on the basis of risk evaluation. The three risks are company, valuation and earnings risk. When a company demonstrates good management and financial stability, the company risk is low. When you are patient enough to wait to buy a good stock until it's trading at a low price, your valuation risk is low. When a company's earnings remain strong, the earnings risk is low. When you find a stock that represents low risk according to these three conditions, it is time to buy. If a negative change happens in any of the three, it is time to sell.

Technicals and Fundamentals

Schloss and Buffett counsel holding a good stock through market fluctuations, selling only when the quality of the underlying company shows signs of decline. But many investors don't hold their stock positions for the long term. Traders watch fundamentals and technicals to determine when to buy and sell. Fundamental trading decisions are made on essentially the same conditions recommended by Schloss and Buffett, but traders aim to take advantages of fluctuations in the stock price -- buying low and selling high. Technical analysis of stock price charts is a tool that some traders use to determine buy signals and sell signals given by price fluctuations.

Making the Decision

Philip Fisher, another legendary investor, gave this definition of the major factors prompting the sale of a stock: “When companies deteriorate, they usually do so for one of two reasons. Either there has been a deterioration of management, or the company no longer has the prospect of increasing the markets for its product in the way it formerly did.” When you decide to buy or sell, follow these investors' advice on factors that should influence your decision.