Buying High, Selling Low
Why 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.
Its 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.
Traders
Experienced traders can make money jumping in and out of a stock thats
caught the publics attention, but its not a game for the inexperienced
and its not investing.
Theres 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 stocks price drops and some of them have
nothing to do with the soundness of the investment. Thats why if you
only follow price you may miss an opportunity.
After a stocks price has fallen can be a great time to buy (buy low)
if you have done your research on the company.
Conclusion
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 wont know what to do unless you understand a lot more
about the company than its stock price.
