Buying High And Selling Low

mistakes.jpgWhy Acting on Price can be a Mistake.

Buy low and sell high is the ultimate guide to successful stock investing. It is also the reverse of what many investors do. It’s not that investors start out to do that, but too often, they use price, and in particular price movement, as their only signal to buy or sell.

Stocks that have gone up recently, especially those with a lot of press, often attract even more buyers. This obviously drives the price up even higher.

People get excited about what they read and see and want a part of the action. They jump into a stock that is already trading at a premium – they buy high.

Experienced traders can make money jumping in and out of a stock that’s caught the public’s attention, but it’s not a game for the inexperienced and it’s not investing.

There’s risk involved and tax consequences along with other issues that mean most investors should leave this activity to short-term traders.

For most investors, trying to grab a piece of the latest flashy stock, usually means paying too much (buying high).Bad Decision: The other side of the market is when a stock has fallen; most investors may want to sell along with the rest of the market. If you go by price alone, this can be a bad decision (sell low).

There are many reasons a stock’s price drops and some of them have nothing to do with the soundness of the investment. That’s why if you only follow price you may miss an opportunity.

After a stock’s price has fallen can be a great time to buy (buy low) if you have done your research on the company.

If all you know about a stock is the price, you may (and likely will) make investing mistakes. Remember, if a stock has had a good run up it may be time to sell, not buy (sell high). Similarly, if a stock has dropped like a rock, it may be a good time to buy rather than sell (buy low). You won’t know what to do unless you understand a lot more about the company than its stock price.

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5 Responses

  1. Shane says:

    I’ve been working with my buddy Tom on this. It’s very sensitive to the amount of capital you have to throw into a stock.

    A $10 stock won’t move as much as a $1 stock if they both take a ride up or down. And percentage-wise you can make a lot more with less capital on the small cap stocks.

    Of course, small caps are also a lot riskier.

  2. Robin Bal says:

    Hi Shane,

    I love your comments mate. Lets say you have 1000$ to invest so you buy 500 shares of a 1$ stock and 50 of a 10$ stock. The stock market goes up by 10%, the amount of profit you make on both stocks is the same{500 becomes 550 for the one dollar stock and the same for the 10$ stock}, 50$ each. Your 1000$ investment becomes 1100$.

    Of course a $1 stock is considered a penny stock and the element of risk is higher.

    Hope I was able to answer your concern.

    Take care and Cheers.

  3. Shane says:

    I’ve noticed you usually get more percentage on the lower priced small caps though.

    Where a $10 stock might go up only 5%, a $1 stock can easily go up 20%. Of course, the $10 stock is more stable.

    I guess a good assortment of risky and stable investments is a good play to take advantage of the positives that both have to offer.

  4. Robin Bal says:

    Hi Shane,

    I agree you can make a killing in small caps, however the risk associated in penny stocks is relatively high and a lot of research is recommended. Find a mix of low and mid caps for diversification. I have invested in 2 mutual funds which are mainly into small caps and the returns are pretty good. The advantage here is that someone else does the research for me and the fund is diversified into a large number of small caps.

    FOR example I would not invest in Nokia, a better idea would be to invest in companies that supply stuff to Nokia. Such companies have low overheads and therefore higher profits.

    A good assortment of risky and stable investments is always a good approach. Diversification is the key mate.

    Take care and cheers

  5. Jag says:

    Hi Robin,

    As one who thinks long term when it comes to investing, I naturally subscribe to buying low and selling high. That’s what I always aim for!

    However let’s not forget that it is also possible that we can also profit as well when we buy high and sell higher.

    Momentum trading works great in a bull trending market. Always good to have some quick cash in the pocket.

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