Why a stock hitting 52 week low does not necessarily make an attractive buy?
It is a dream of every investor to buy low and sell high. Where do you see a stock available low? - Obvious answer to this question is to go for list of stocks quoting at 52 week low. Exchanges and media both are quick to offer this list which makes it a low hanging fruit for many. But the reality can be way different. One may not necessarily get a good 'buying opportunity' when he is looking at a stock quoting at 52 week low.
To understand the risk one is exposed to when he buys a stock just because it is quoting at 52 week low, we should understand how the 52 week low stock list is made. When a stock's current price is lowest as compared to the prices it has quoted over last one year, the stock is included in this list. However that does not mean the downside in the stock is over. The stock price can tumble further the next day and it will again appear in the 52 week low list for that day. A stock in downward trend will keep appearing in the 52 week low list for many days. And one may not make any money buying a stock which is moving down because the business fundamentals of the company are ruined.
Classic example of this is the downfall in technology stocks post dot com bust. The stocks were in downtrend for months and ruled 52 week low list for long period of time, before disappearing from the trading screens. If one would have bought into one such name just because it is quoting at one year low, he would have lost his capital.
Technical analysts treat a stock hitting a new low as an opportunity to further sell that stock, as the stock quoting at new low confirms continuation of bearish phase. Fundamental analysts do look at stocks quoting at low prices, but they seldom buy them. The buy action in stocks quoting at 52 week low by a fundamental analyst, is generally backed by solid analysis of the business fundamentals of the company. Hence it pays not to solely rely on 52 week low price as a good buying price for a stock.
It is a dream of every investor to buy low and sell high. Where do you see a stock available low? - Obvious answer to this question is to go for list of stocks quoting at 52 week low. Exchanges and media both are quick to offer this list which makes it a low hanging fruit for many. But the reality can be way different. One may not necessarily get a good 'buying opportunity' when he is looking at a stock quoting at 52 week low.
To understand the risk one is exposed to when he buys a stock just because it is quoting at 52 week low, we should understand how the 52 week low stock list is made. When a stock's current price is lowest as compared to the prices it has quoted over last one year, the stock is included in this list. However that does not mean the downside in the stock is over. The stock price can tumble further the next day and it will again appear in the 52 week low list for that day. A stock in downward trend will keep appearing in the 52 week low list for many days. And one may not make any money buying a stock which is moving down because the business fundamentals of the company are ruined.
Classic example of this is the downfall in technology stocks post dot com bust. The stocks were in downtrend for months and ruled 52 week low list for long period of time, before disappearing from the trading screens. If one would have bought into one such name just because it is quoting at one year low, he would have lost his capital.
Technical analysts treat a stock hitting a new low as an opportunity to further sell that stock, as the stock quoting at new low confirms continuation of bearish phase. Fundamental analysts do look at stocks quoting at low prices, but they seldom buy them. The buy action in stocks quoting at 52 week low by a fundamental analyst, is generally backed by solid analysis of the business fundamentals of the company. Hence it pays not to solely rely on 52 week low price as a good buying price for a stock.
Happy Investing
Source:Moneycontrol.com
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