Should you buy cheap FTSE 100 stocks when you find them? There is a right and wrong time to invest in shares, and cheap prices do not always mean a good deal.
Those getting into the world of the FTSE 100 and other types of investing might make the mistake of thinking that you should just buy cheap stocks whenever you can. However, in doing so, you might end up with more issues than you started with. If you can’t answer basic questions like what is share price? and what can affect these prices?, you are soon going to run into issues.
What is the FTSE 100?
The FTSE 100 is a list of 100 companies with the highest market capitalisation on the London Stock Exchange. This is one of the most important stock exchanges in the world, along with those in New York, Hong Kong, and Tokyo to name but a few.
Market capitalisation is worked out by multiplying the price of the shares in the company with the number of outstanding shares available. Since this stock is bought and sold on the public exchanges, market capitalisation can often be thought of as a determining factor in how the company is viewed by the public as a whole.
Those who wish to buy shares will most likely use an index like the FTSE 100 when they first get started. It is a great place for you to gain some confidence as an investor. However, how do you tell when shares and stocks are the best to invest in? It can be tempting to just buy low-priced stocks and see how they work out for you. However, this might not be the best idea.
What Pushes the Price of a Stock Down?
Stock prices are based on a variety of factors, but it can often come down to supply and demand. Prices will always rise and fall, and there is unfortunately no secret formula that will tell us which way a particular price will go.
It is important that you consider the reason why the price of a stock will be falling if you find it. Common factors like inflation and market strength will have a big impact, but other simple factors like trends and demographics can also have a major effect.
For example, if a stock is on the rise, you might be tempted to jump in before it has the chance to leap up in cost. However, in doing so, the price of the share can quickly peak and then end up falling away. You will end up without any profit to show for your efforts. Even simple things like news events can have a massive impact on the stock market. What might seem like a good idea one minute will prove to be a disaster if the wrong news piece breaks.
Never just buy a price because a stock is low. You need to make sure that you understand why the share is priced at that value, and how the market is about to change in the future. If it only continues to depreciate in the future, you will have invested poorly. You need to make sure that you have the analytical skills necessary to recognise why a share might be cheaper so you can find the ones that you know will deliver a good return.
Have a Goal in Mind
When investing, you need to make sure that you have a plan of action in mind. Though a certain share might look interesting, it is not always worth it to jump into a new line of investing without any plans. Having different stocks and shares here, there, and everywhere can be too difficult for you to control and manage. There needs to be some sort of system in place, something to help you check and manage your various investments.
It is vital that you have some sort of plan or strategy in place when it comes to investing. This can only come from your own research and devotion to learning. Operating blindly within the world of stocks and trading is foolish as it is just going to lose you money. You instead need to make sure that you are spending time educating yourself on platforms like the FTSE 100 so you know which investments will be best for you.
For example, it is vital that you know how your investments line up, as you need to know how balanced your portfolio is, and how vulnerable you are. A diverse portfolio is the goal here – it will help you to mitigate risk and should help to protect your investments if there is a market crash.
Buying cheap stocks on the FTSE 100 is a great move for new traders, but you need to make sure that you are not investing wildly with no rhyme or reason. When you encounter a cheap stock, make sure that you know why it is that price, and what benefit it will offer you. You do not have to purchase every cheap share that you come across, as this can often result in you spreading yourself too thin with no idea as to how you can actually turn a profit. Whatever you choose to invest in, make sure that you have a plan of action!
