When Is the Best Time to Buy and Sell Stocks?

When to Buy Stocks

Here are some scenarios when it may be a good time to consider buying stocks.

You Have a Long Investment Timeline

The longer you're invested, the more time you have to benefit from compound interest. This allows you to earn interest on your initial investment plus the gains you've already earned. You can use this to your advantage when investing for a long-term financial goal like retirement.

Let's say you start putting 10% of your income into a 401(k). You're 35 years old and your salary is $100,000. After 30 years, you would have contributed $410,000—but your balance would be over $1 million, assuming a 6% rate of return. That's the power of compound interest.

There's a Stock That's Undervalued

Buying individual stocks can be risky because there's no guarantee they'll perform the way you hope. The idea is to buy stocks when they're undervalued, then sell them when they're eventually worth more. There are two popular ways to measure the value of a stock:

• Relative valuation: This looks at how a stock is performing when compared to its competitors. You first find the price-to-earnings (PE) ratio by dividing the current stock price by its per-share earnings. A company that has a lower PE ratio than its competitors may be undervalued.
• Absolute valuation: This method looks at a company's overall financial health to determine the true stock value. That includes its balance sheet, cash flow, assets and other relevant information.

You Believe in a Company's Values

If you're thinking about when to buy stocks, know that many investors devote some or all of their portfolios to ESG investing. This is when you intentionally invest in companies that share your values. These organizations may prioritize environmental sustainability, social justice causes you care about or diversity, equity and inclusion efforts. If all goes well, these companies will succeed—and you'll net investment returns in the process.

You Want to Position Yourself for Growth

While low-risk investments like bonds, certificates of deposit (CDs) and money market accounts typically provide stable returns, your portfolio may struggle to keep up with inflation over time. Stocks can help fuel growth and secure better returns over the long haul. Investment risk is higher, but staying diversified can help offset losses along the way. That means buying a mix of securities across different asset classes and risk levels. If you invest only in stocks, you could suffer major losses if they underperform. Overall market downturns could also spell trouble for your portfolio.

When to Sell Stocks

You may think about selling your stocks under certain conditions.

You've Reached Your Goal

Investing can help you reach long-term goals like retiring or paying for your kids' college education. You might choose to offload some stocks once you cross the finish line. In retirement, for example, one rule of thumb is to go lighter on stocks and heavier on bonds.

Other investors set financial targets for individual stocks. That might mean selling a stock once its value hits a certain point. You can place what's called a limit order so this happens automatically.

You're Rebalancing Your Portfolio

Your asset allocation refers to how your portfolio is organized. A 60/40 portfolio, for example, holds 60% stocks and 40% bonds. The best asset allocation for you will depend on your age, goals and risk tolerance. Even if your holdings feel just right, you'll likely need to rebalance your portfolio at some point. Stock values change over time, and that could throw things out of alignment. Rebalancing often involves selling high-performing assets and redirecting the returns, which can help restore your desired asset allocation. It's a good idea to do this annually.

There Are Changes Within a Company

There may be times when owning stock in certain companies no longer feels like the right fit. If revenue is steadily declining or the company is making decisions that go against your values, you may feel inclined to part ways. You might also consider selling if the company is being bought out by a larger organization. Stock prices tend to increase soon after that information goes public.

You Need to Liquidate

If you encounter a financial emergency and don't have funds on hand to cover it, selling stocks could free up cash. However, there's no guarantee you'll net a profit or recoup your initial investment. You can easily pull money from a brokerage account, but withdrawing funds from a 401(k) or traditional individual retirement account (IRA) will likely trigger a 10% early withdrawal penalty—and a tax bill.

When to Hold Stocks

It's not always about buying and selling stocks. Here's when you might consider holding stocks in your portfolio:

You're Investing for a Long-Term Goal

Market volatility causes stock values to fluctuate. A company's share price can go up and down in response to economic changes, political uncertainty, industry shake-ups and more. Price swings can happen gradually or relatively quickly, but the stock market has had an average annual return of 10% since the 1920s. If you have a long timeline ahead, it may be best to ride out market dips and stick to your investment plan. You'll likely have time to bounce back from short-term volatility.

You Want to Avoid Higher Tax Rates

You may have to pay capital gains tax when you sell stocks. The amount will be based on your income, tax filing status and how long you held the stock. Short-term capital gains tax applies to assets bought and sold within a year. This tax rate is the same as what you're charged on ordinary income. Long-term capital gains tax is typically lower. Holding stocks for at least a year could translate to a lower tax bill.

4 Tips for Investing in Stocks

1. Take advantage of employee benefits. If you have a 401(k) at work, start there. It's a simple way to buy stocks, bonds and other securities. Contributions are made through automatic payroll deductions, and the money you put in is tax-deductible. If you have an employer match, all the better.
2. Leverage stock funds. These are investment vehicles that allow you to buy a wide range of holdings. Exchange-traded funds (ETFs) and mutual funds provide built-in diversification and are generally seen as less risky than individual stock picking.
3. Diversify your portfolio. One way to mitigate investment risk is to spread your investments out across different asset classes. You can diversify even further within those categories. This prevents you from having too many eggs in one basket. If one part of your portfolio loses value, gains in other areas can help balance things out.
4. Work with a financial advisor. They can provide personalized investment guidance. The right financial advisor will also look at your overall financial health and help you plan for the future.