How to Find the Next Hot Stock and When to Sell?

When to Buy High Profitable Stocks and Sell it? A Complete Guide

Looking for hot stocks can be a tricky thing, especially for new investors who do not understand the market as well as the experienced investors. To start off, it must be said that there isn’t any particular way to find good performing stocks. There are different strategies that can be adopted to find hot stocks. As it happens, different strategies work for different types of investors.

Firstly it is very important to gain experience of the market. You cannot find hot stocks without having some experience of how the market works under your belt. Therefore if you are a beginner investor then you should spend time in gaining knowledge of how the market works. Try to see what the big investors are doing, where they are investing and try to see why the big investors or any other investor you know, are investing in particular stocks.

For example if someone you know is keen on investing into Amazon or Tesla, then try to find out why exactly they are trying to invest into these companies. Yes these are popular and hot stocks right now but why? This “why” will help beginners go a long way. You may make a few mistakes along the path but every investor makes these mistakes. Making mistakes is a part of the learning process.

Follow Smart Money

One of the easiest ways to find out hot stocks is to find where the smart money is going. Smart money refers to the investment being done in the market by big investors such as Warren Buffet or Gates. These big or smart investors understand the market better than the smaller individual investors and therefore wherever they are investing, is surely going to be the right place to invest into.

The downside to this strategy is that you cannot know what to do in advance. Big investors submit their investment portfolios that are usually made public 40 days to 3 months later, depending on the laws of the country. This means that it may already be too late for smaller investors. Sometimes, stocks can rally for months and in such a scenario the advice of following smart money will definitely work but in a situation where the stock rallies change in a matter of weeks, this may not be such a good strategy.

The best example of how harmful this can be for a novice investor is what happened early in 2020. Till mid February, the stocks were doing good and therefore the investment decisions of big investors till this date would have been different. However the March of 2020 saw a major stock market crash followed by the global pandemic that caused investors to change their investment patterns. So if an investor tries to follow the investment decisions of big investors from February into the markets of April, then this would lead to losses because the situation took a completely different turn between February and April.

It is therefore important for the investors to be “smart” if they want to follow the flow fo smart money.

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Identify Value Stocks

We may have to have a second look at the definition of the hot stock for this strategy. Hot stocks are stocks that are in popular demand. Now a stock maybe popular because of positive market expectations, for instance stocks like Amazon and Tesla are hot stocks. A stock can also be hot if it is not very popular, it may not even be on the radar of many investors. Well how can it be a hot stock then?

Well, the stock does not have to be popular to be hot. Value stocks refer to stocks of companies that are financially strong and stable but they become undervalued by the market for some reason. As a result of a period of time, the stock price of such a company will be below its real value, thus the stock price will be undervalued. Investors who buy the stocks of an undervalued company, can buy the stocks at a bargain because in the future the market will correct itself and appreciate the value of the undervalued company.

Let us try to understand this through an example.

Suppose that the stock of company A is valued by the market at $40 but the real worth of each stock, as calculated by the net book value method is $60. This under value is because there is a negative perception in the market that the company is going to lay off its workers in the next month.

Financially the company is very strong and stable and there is no other reason for it to be valued less apart from the negative market sentiment attached to it. The ethical problem has resulted in the stock of the company being undervalued.

Any intelligent investor would know that this undervalue won`t remain for a long time and over time the market will correct its sentiment. The market always corrects itself, look at Deutsche Bank, Volkswagen and BP as prime examples.

So any investor who decides to buy the shares of the company while it is undervalued will be able to buy the shares at a bargain, less than $20 than the actual worth of the share. After a month it turns out that the company did not lay off its employees and as a result, the market now reacts positively and corrects itself and now the share value of the company climbs to $60.

Undervalued companies are thus also hot stocks but only for investors who try to look for them. There are certain factors through which undervalued companies can be identified. For instance a company with a low P/E ratio but high EPS and profitability is undervalued.

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When to Sell?

If we look at Warren Buffet and ask him when to sell the stocks, he`ll say “Buy low and sell high”. This is what smart investors do. When the market tanks and everyone panics, the big investors do not panic and start selling, instead they exercise patience and wait. When everyone sells, the smart investors buy the stocks at cheap rates, they wait and then once the market reaches its high peak again, they sell their investment at a high rate to cash out on a profit.

Whatever strategy you adopt as an investor, make sure that you understand your strategy fully well and before adopting it. Do not panic if you make a mistake and your strategy turns out to be wrong. Instead, go back to the drawing board and try to understand what went wrong. This process will allow you to learn from your mistakes and help you become a better investor.

Main Image Source: Pixabay

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Dave Peterson
Dave Peterson
Be a little better today than yesterday.


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