Best time to invest in stocks

From inflation-beating returns to owning a stake in some of the best-known household brands such as Starbucks or Amazon, there are plenty of reasons to buy shares. You can have a say in how a company is run and even make money when its value or share price rises. Unfortunately, you will also lose money if its share price falls.

No one can predict the future, so it can be hard to know the best time to invest in a stock. In the absence of a crystal ball, there are factors you can consider when timing your entry into the stock market to assess if a stock is worth buying or selling.

Here is what you need to know.

What influences the price of a stock?

There are lots of factors that can influence a company’s share price, including its own financial performance, annual reports, trading updates as well as good and bad press.

For example, popular exercise bike company Peloton’s share price fell 11% in just one day in December 2021 when a character in the Sex and the City reboot And Just Like That… died after suffering a heart attack on the machine.

The wider political, social and economic environment can also have an impact.

So-called “stay-at-home stocks” such as Zoom and Netflix performed well over the start of the pandemic as they benefited from the lockdown restricting everyone to their sofas.

In contrast, holiday-related stocks didn’t fare as well due to restrictions on international travel. Tourism and travel stocks plummeted at the end of November 2021 after the new Omicron coronavirus variant emerged, prompting governments to impose travel restrictions.

When is the best time to invest in stocks?

There are a number of times that you can invest in stocks. Here are some good times to consider investing and how to decide when to invest.

Option 1: After an initial public offering (IPO)

The initial public offering is when a company first sells its shares on the stock market, known as the primary market. A company that’s hoping to “float” will publish a prospectus that details its business and growth plans and will work with brokers to reach an offer price that you can first buy the stock with.

Typically, retail investors aren’t able to purchase on the primary market, but we’re seeing changes to this with recent IPOs, such as Deliveroo’s recent one.

You could invest shortly after the IPO by purchasing shares through a stockbroker or on a DIY investing platform. Getting in on the ground floor can be a good time to start investing in a stock as it could be the cheapest way to get a stake in a company.

For example, Amazon’s offer price was $18 (about £15) per share at its IPO in May 1997 and has grown by more than 100,000% since then. It may seem pretty pricey to purchase a whole Amazon share now but some platforms may let you just buy a portion, known as fractional shares.

You need to be confident in the valuation and be confident that the stock will rise or at least be stable and realistic when you first invest otherwise you could end up with a loss. Analyst notes and forecasts can give you an idea of how accurate a company’s offer price is and if you could be paying over the odds.

A stock can often rise due to the hype around an IPO and later fall or it may even drop initially and take time to grow. This makes it important to consider the fundamentals of a company when choosing the time to invest in a stock.

Option 2: During rapid expansion

A growth investor will try to identify companies that are expanding rapidly. These types of companies often have consistently high revenues and profits, which will ultimately help their share price grow.

Investors will look at who is behind a company and its business plan as well as its recent revenue and profits. Past performance does not guarantee future returns but investors will often consider a stock’s performance over a few years and compare it with others to see how fast they are growing and if there is room for more growth.

One metric that investors may use is compound annual growth rate (CAGR), which provides an annual growth figure for a company based on a defined period of revenues such as 3 years. This can be risky as it can be hard to identify when a company’s value has reached its peak and some may be tempted by firms trying to cash in on the popularity of a particular theme or sector.

For example, investors flocked to technology stocks during the dot com boom in the 1990s until the value of many companies crashed when evidence for their valuations was called into question.

Option 3: When stocks are undervalued

A value investor will try to spot undervalued or unloved stocks, which may be due to a low share price or low p/e ratio. The hope is that they identify companies they feel are being overlooked by the wider markets that they believe could return a profit.

Company accounts, analyst reports and news stories could give you an idea of the outlook for a company and if now is a good time to invest. The returns could be decent if you spot a company that is set to turn its stock around and the shares rise in value but there is also a risk that they stay low or even fall further.

Option 4: When other investors are selling

In investing, going against the grain is called contrarian investing. This aims to go against the herd by buying shares when others are selling or vice versa.

There may be certain companies or sectors that the markets feel have gone out of fashion but a contrarian investor may instead prefer not to follow trends and instead hold onto shares they believe have a dominant market position and will stand the test of time or at least grow in the long term. This approach can take a lot of patience and bravery.

One of the most well-known contrarian and value investors is Berkshire Hathaway’s Warren Buffett.

The Sage of Omaha has become an investing veteran by backing and holding onto companies that are dominant in their sectors such as Coca-Cola and Gillette and are performing well even if it isn’t yet reflected in their share price.

Option 5: When other investors are buying

Rather than looking for what others are missing, there is no harm sometimes in following the crowd in what is known as momentum investing.

Momentum investors identify certain fashions or themes and will buy stocks on the assumption that they will continue to rise, such as the aforementioned “stay at home” stocks that they banked on becoming more popular as people spent more time indoors.

Option 6: When companies are paying dividends

Rather than going for growth, some investors may choose stocks for income. These are companies that make regular payouts, known as dividends, to investors.

Dividends are usually paid by larger and more established companies. Their share prices may no longer skyrocket, but they can be a reliable source of income. A dividend is like a reward payment from a company for your investment. It can be paid monthly, quarterly or annually. There may be tax to pay though as everyone has an allowance of £500 that they can earn from dividends before they are taxed.

Don’t get too used to the payments. There is always a risk of a dividend being cut or scrapped altogether. Hundreds of companies such as banks cut or scrapped their dividends in 2020 as it was felt that it would be inappropriate to give large payouts to shareholders during the pandemic and many struggled to find the spare cash.

When to buy and sell stocks: Key things to remember

The best time to buy or sell a stock depends on your strategy. You may be excited by a new public listing in a sector you are passionate about or believe is set for growth, or you may spot a stock that is looking cheap or a company that analysts believe is set for growth.

Stocks often have a decent boost when they have an IPO as they are buoyed by the excitement and market momentum. This doesn’t always last and isn’t always guaranteed.

1. If a stock falls: Don’t panic

It is important not to panic when a stock drops and to look for the reasons why a company’s share price may be falling and its prospects for recovery. Selling too soon can mean cashing in on a loss. You might miss out on a recovery that could have boosted your portfolio.

2. Cheap doesn’t mean undervalued

Buying a stock just because it is cheap can be risky. There may be reasons it is so low, so it is important to check its fundamentals and other sources such as analyst and media reports.
A better option can be to build a diversified portfolio across different sectors and investing strategies so if one style or sector is struggling, others that are doing well can pick up the slack and compensate for any losses.

3. Buying the dip isn’t as simple as you think

Most people want to know if they should wait for stocks to drop in value before investing.

Investing when a stock has dropped can be a cheap way of buying a stake in a company – sounds simple, but it’s a bit like trying to catch a falling knife. Timing is important. If you don’t catch it cleanly, you could get hurt. In the case of stocks, it could mean losing money. You need to be sure that the stock has reached the bottom before you buy, or the value of your holding will fall.

Hesitation can also lose you money. The share price may be just one factor in buying a stock so it could be worth buying sooner rather than later if you believe a company is likely to grow further.

You may also choose a share as a source of income due to its high or regular dividend payments, so you may not want to wait until its share price drops.

Finder survey: What aspects of a share trading platform would matter most to you when choosing one?

Is there a best time of day to invest in a stock?

Like any business, stock markets have their own opening and closing times and you can usually only trade during these hours. For example, the New York Stock Exchange is open from 9:30am to 4:30pm, while the Nasdaq closes half an hour earlier at 4pm. The London Stock Exchange operates from 8am to 4:30pm – you can only buy and sell shares during this period.

Day traders, who are more focused on buying and selling stocks quickly to get a quick profit, tend to be more concerned about the best time of day to buy or sell. Stock prices can rise or fall quickly just as a market opens as traders have digested news or economic events since the markets closed and prepared their trades and positions overnight.

The middle of the day tends to be calmer in terms of price volatility, while stock prices can be a bit more unpredictable towards the end of the day as active day traders attempt to buy or sell before the market closes.

This shouldn’t matter if you are investing for the long term, such as for your pension or in an individual savings account (ISA), as a diversified portfolio smooths out some of the losses over a few decades, letting you benefit from more highs than lows in the stock market.

What is the best day of the week to invest in stocks?

There are a couple of theories about how markets perform during the week. Some stocks may be hit by the “Monday effect”, where the market follows wherever it was heading on Friday, and usually end up falling. This is because companies tend to release bad news at the end of the week or over a weekend in the hope that it gets less coverage.

Is there a best month to invest in a stock?

The global and 24/7 nature of business nowadays means activity never really stops, so there is some doubt about if there is actually a best month to invest in.

There is an old investment adage that investors should “sell in May and go away, come back on St Leger’s Day.” This refers to an old 18th-century English tradition where traders would quit London for somewhere warmer in the summer months and come back during Autumn in September. Whether this is true tends to depend on the period you are looking at.

Followers of this mantra claim that markets are more lacklustre during the spring and summer months as there are fewer traders around and more people are on holiday, which can hit returns. Investment platform Tilney looked at 31 years of total return data for the FTSE All Share Index in 2017 for between May and September.

It found that investors would have made positive returns by staying in the market for 20 out of the 31 years. This compares with markets rising 77 per cent of the time across the full calendar year over this 31-year period. This illustrates that it is pretty hard to guess the best month to invest as you only really know once it is over.

Another popular investment term is the “Santa rally”. This is a belief that traders and funds will finalise their stock sales and purchases to close their books in the final days of the calendar year so they can then enjoy the festive period. The term was coined by analyst Yale Hirsch in 1972 after finding evidence that the Dow Jones Industrial Average rose every year around the festive period all the way back to 1896. Additional analysis suggests the S&P 500 has had a Christmas boost 17 out of 26 times since 1993.

Evidence for these concepts can depend on the market, index and stock you are looking at and it may vary by year, plus historical performance is not a guarantee of how shares will perform in the future.

Is now a good time to invest?

Warren Buffett famously said the best time to invest was several years ago, the second best is now. Ultimately, the earlier you start investing in stocks, the more you can smooth out any losses and benefit from returns.

Long-term investors also benefit from compound interest. This is where you can start with investing just £1,000, for example, and if your stock portfolio grows by 5% in a year, you then have an extra £50 to put into the markets without having to commit any of your own money beyond the original capital. If markets grow by another 5% over a year, your £1,050 will have earned £52.50 to turn into £1,102.50 but you have still only committed £1,000.

The key is to do your research and understand what you are investing in and why and to assess when is a good time to buy, sell or hold based on your analysis, savings goal and strategy.

Our expert says: When is the best time to buy shares?

"Shares have the potential to offer higher long-term returns than just leaving your money in cash, where the value will be eroded by inflation. Building a diversified stock investment portfolio can help reach your savings goals faster than relying on cash as the returns are higher. Long-term investors shouldn’t worry too much about the best time, day or month to invest in a stock as a balanced portfolio should perform well over a good few years.

It is still important to keep an eye on your portfolio and use financial metrics, company data, analyst reports and news stories to monitor a sector to spot new investments or make changes to your existing portfolio."

Zoe Stabler DipFA

Senior writer

Bottom line

It is not all or nothing when it comes to these investing strategies and some of these techniques may be best in certain economic periods or when a particular theme such as technology is in fashion. It’s a good idea to mix and match, which will help you build a diversified portfolio with lots of different companies that hopefully perform well over the long term.

Stock investing can be more beneficial than leaving your money doing nothing in your bank account or a paltry savings account. Deciding on an investment strategy will help you assess the best time to invest in certain stocks depending on their sector or the social, political and economic environment. Don’t worry too much about the best time, day or month to invest. Time in the market can be more important than timing as certain stocks can go in and out of fashion depending on the economic environment.

You may be better off holding a portfolio of stocks mixing income, growth, value and momentum strategies that can perform well and smooth out losses over the long term.

Frequently asked questions

• What happens if I place a market order for stocks after hours?

  Some platforms and brokers may let you buy or sell stocks outside of trading hours such as in the evening, at weekends or on bank holidays. They may offer an after-hours market but share prices can be different as there is less supply and demand.

  This can be risky, as the markets tend to be quieter, meaning there is less liquidity and you may not get a fair price for what you are buying or selling.

  Additionally, the price may change when the markets actually open as larger investors and active day traders will have prepared their positions.

  Alternatively, you can set up a stock purchase to go through once markets open, but you could also find that you have overpaid if the stock drops straight away or you could make a decent profit if it rises.

• What time does after-hours stock trading close?

  The timing for after-hours trading will depend on when the stock market where a company is listed closes.

  Stock market operating times vary but tend to be between 8:30am and 4:30pm in that country’s time zone.

  After-hours trading usually starts once the market closes, but this will depend on whether your chosen platform or broker offers this service.

• What time of day are stock prices lowest?

  Long-term investors don’t have to worry about the best time of day to buy stocks as daily movements will be irrelevant if you have a time horizon of many decades.

  For day traders, stocks can be at their lowest just as markets open before a frenzy of activity to consolidate positions and portfolios begins.

  Similarly, the end of the trading day can also be busy as traders react to the day’s news and try to get their deals done before markets close.

• Where did the term Monday effect come from?

  The term comes from an article in 1973 that was published in the Financial Analysts Journal by Frank Cross. He claimed that the average return on a Friday typically exceeds the average return on a Monday. There is no firm evidence of this and other studies have questioned it. Some even claim that Monday returns can actually be higher than the other days of the week depending on the size of the firm.

Written by

Marc Shoffman

Writer

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Marc is an award-winning freelance journalist specialising in business and personal finance. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and Business Insider. He also co-presents the In For A Penny financial planning podcast. See full bio