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.
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.
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.
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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.
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 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).
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.