What Does Buy Point Mean With Stocks?

A "buy point" for a stock is a range or price at which an investor or trader will agree to enter/purchase a stock position. This is commonly based on two general forms of evaluation: the fundamental value of a company's stock or the price of the stock relative to it technical price trading ranges.

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Fundamental Buy Points

An evaluation of the fundamental information of a company versus its stock price is a common method used to determine when a stock is inexpensive enough to warrant a purchase. For example, one method some investors use is to buy only when a stock has a price-to-earnings ratio (P/E) below a certain level. If annual corporate earnings are $2 per share and the desired buy point is a P/E of 10 to 1 or less, he would pay no more than $20 per share for the stock.

Technical Buy Points

Many investors/traders use charts to help define the entry point into a stock position. Perhaps a stock price has a pattern of four-point advances followed by two-point declines. Rather than buying at the top of a price advance, a potential buy point can be isolated after a two-point pullback once the pullback appears to have begun.

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A simplistic example: "XYZ" stock begins advancing from $40 and rallies to $44. It pulls back to $42, then climbs to $46 followed by a retreat to $44. If this pattern is expected to continue, a stock purchase could be made at buy points in an area at which the decline may be judged to be completed.

The same is true of stocks that trade in ranges. For example, if a stock trades between $50 and $55, a buy point may be considered just above $50 for an expected move back to $55.

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Buy Limits

Instructions for buy orders can be given in several ways. The ordinary "market order" is just that--an order to buy immediately at the next available market price. However, a "buy limit" provides instructions that you will pay no more than your specified price. If XYZ is trading at $55, you may enter an order to "buy 100 XYZ limit $50.50" ($50.50 being your predetermined buy point) and your order will not fill until $50.50 or less is achieved.

Buy Stops

Buy stop orders are another way to enter at your buy point, but they are conditional. In the example of a trading range, a trader may judge that a buy point is best entered on a break ABOVE the trading-range level. If the top of that range is $55, a buy stop could be entered at $55.50 instead. This instructs the brokerage to buy ONLY if the stock trades at $55.50 or above, and it turns the order into market order for immediately execution (purchase). This is used for "breakouts," a term used to signify a level at which buyers (demand) have overpowered sellers (supply).

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Managing the Purchase

The significance of identifying buy points is that it enables you to identify and isolate purchase points in a stock. This typically is done to improve (lower) the purchase price and/or confirm that a trend can be taken advantage of. Likewise, sell points can be established once a buy point has been triggered that will help with managing the trade.

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