How to Quickly Know When Your Favorite Stock is Cheap




Wouldn’t you love to get shares of stock for next to nothing? Maybe even a half off stock sale? Possibly get some shares off the clearance rack? Not too likely. You can however put the odds in your favor when you look to buy your next lot of stocks.


I’m not sure if you’re familiar with the TV show Extreme Couponing. If not, do a quick search on YouTube and search for ‘extreme couponing’. Watch any clip of any episode and you’ll get the idea.


Basically, people on this show gather enormous amounts of coupons and then head to the grocery store. Once there, they purchase hundreds of dollars worth of grocery items for a tiny fraction of the cost. Literally, fractions of the actual cost. I’ve watched a few shows where all the savings from their coupons amounted to them spending less than a dollar for $900 worth of items.


Are There Coupons for Stocks?


Unfortunately for you and I, there are no coupons we can download to give us a big discount on shares of Apple. You would think you’d be entitled to at least one share with the cost of each iPhone. You can however, take advantage of the same goal of these bargain hunting shoppers.


You only buy what’s on sale. 


That’s one of the things about the show that always amazes me. These shoppers only buy the items that are on sale and that they have a coupon for. They watch patiently for any and all advertisements of upcoming sales and only then do they considering purchasing those items.


It takes a patient and disciplined person to only buy stocks at a certain price. That’s the way that you want to invest; disciplined and not moved by emotion. Often you’ll hear about the great profits a company is enjoying and you’ll immediately want to log into your brokerage account to place an order. It’s not necessarily anything wrong with this approach, but you’re probably going to be overpaying for the stock.


Buy Low, Sell High…But What’s Low?


This is such a common phrase in the stock and investing world, but many people really have no idea when a stock is high or low. The only way to really know for sure is to follow the stock…consistently. You buy so many things in your daily life that you automatically know what certain things will cost.


If you were to buy a cup of coffee and they told you it was going to be $10, I don’t think you’d be too eager to hand over your hard earned money. Why? Because you’d know that $10 was way too much to spend on one cup of coffee.


A great place to begin figuring out where the low of a stock is, would be to pull up the company on a stock chart. Take a look at where it’s trading right now. Now look back in time on the chart and see when was the last time it was at this price. You may have to look at a one to five year chart in order to get a better idea. If you can’t find a time when the stock traded at it’s current price, you may be watching the stock trade at a new high or new low.


Let’s break it down even further so it’s simple to understand.


Say you have a stock that’s currently trading at $50. Looking at a five year chart you see that the stock has gone as high as $75. That same chart also shows you that the lowest it’s shares have ever been is $40. Based on the stock’s current price of $50, you could say that it is nearing it’s low. Even if you don’t agree that it’s near the low, you can agree that it is closer to $40 than it is to $75.


Finding out a stock’s lowest point really isn’t that difficult. It’s only when you simply think or hope that a stock is a bargain, without having looked at a chart yourself, that you end up buying or selling at stock at an inopportune time.


It’s worthwhile to mention that the time frame you look at can be a topic of debate as well. If you’re thinking of taking a position for only a few months, a chart with a 10 year view may be more data than you need to make your decision. However if you have a short term outlook, a one or two year chart may give you enough insight.


Finding the balance of knowing where a stock has been and knowing where a stock has been recently, only comes with continually viewing charts for lots of stocks. As they say, practice makes perfect.


Make Your Own Coupons.


There are ways to get stocks at a discount. One way would be to buy stocks that pay a dividend. A dividend is a payment made by the company to owners of their stock. The total dividend payment is paid out over the course of a year. Most dividend payments are made quarterly, or every three months, while some stocks pay their dividend on a monthly basis.


However the dividend is paid, the result is the same. You are paid to own their stock. If a company pays out a $2 dividend, then over the course of a year, you would receive $2 for every share that you own. With a quarterly dividend payment you would get $0.50 deposited into your brokerage account every three months ($0.50 x 4 =$2.00).


The way to use dividend payments as a sort of coupon would be to use them to purchase more shares of stock.


Using the example above, let’s say that shares of that stock cost $50.


For all of you playing at home that would make this a stock with a 4% dividend yield ($2.00 / $50.00 = 0.04 or 4%). If we have 100 shares of this company, over the course of a year we would have an additional $200 in dividend payments just for owning the shares.


Here’s the good part.


If you were to take that extra $200 you received in dividends, you could purchase another four shares of this $50 stock. Now I hear you saying ‘that’s only four shares‘. ‘That’s not going to make me the kind of money I was looking for‘. Well maybe not yet it won’t.


The beauty of using dividend payments to buy more shares is that it does two things:

  1. You get more shares without spending any more of your own money.
  2. You get more dividend payments because you have more shares.


It’s pretty much rinse and repeat this over and over again. If followed correctly, you can potentially grow your portfolio with only one initial deposit…just the money needed to buy your first shares. This is in no way meant to be a ‘get rich quick strategy’ and in my opinion, investing in the stock market shouldn’t be viewed that way.


No doubt you have read countless stories where someone hit it big in the market and made a million dollars in less than a year with only a few trades. I do not suggest this be your focus. Am I doubting your ability? Definitely not. I’d much rather get rich slowly rather than lose it all because I made rushed and emotional trades and investments.


If you continue to trade you will have trades that provide more profit than you were expecting. You’ll also have losses that you didn’t see coming as well. Your job is to make the losses as small as you can while continuing to have more and more gains.


One More Option


Another consistent way to reduce the cost of buying stock is by using covered calls. A covered call is where you own at least 100 shares of stock and you then sell 100 options, or one contract, for an amount of money that you get to keep. The money that you pocket in this strategy is known as the option premium. For a more detailed explanation of a covered call read this.


You would use the covered call premium in much the same way you would the dividends, to purchase additional shares of stock. Covered calls can generate monthly income so it definitely has the potential to increase your purchasing power over the long run.


To really make all of this worth your while, you could focus on buying only stocks that pay a dividend and have options available. This way, you’re not only taking advantage of dividend payments, you’re also adding extra income by selling a covered call. That’s the way to really increase your wealth and income without having to invest a ton of your own money.


As I stated before, this strategy will take time to eventually show big returns. Look at it this way;

Any money you make from the market is money that you didn’t have before.


If you stick to the plan, you can grow your account to one with thousands of shares…and you may only have started with a hundred shares or less.