Why Acting on Stock Price Can Be a Mistake
Buy low and sell high. You've heard the advice countless times. It's the ultimate guide to successful stock investing, a virtual mantra of seasoned investors. It's also the reverse of what many investors actually do.
It’s not that they start out with the intention of buying high and sell low. But far 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, and this obviously drives the price up even higher.
People get excited about what they read and they want a part of the action. They jump into a stock that's already trading at a premium. In other words, they buy high.
When Traders Do It
Experienced traders can make money by 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 really investing. There’s definite risk involved and there are tax consequences so you really have to know what you're doing.
Other issues are also involved, so most investors should leave this type of activity to short-term traders who excel at it and who know the tricky ropes. For most investors, trying to grab a piece of the latest flashy stock usually means paying too much or buying too high, sometimes way too high.
Selling Low Can Be a Bad Decision
The other side of the market happens when a stock has fallen. Most investors immediately want to bail out and they unload and sell along with the rest of the market. But selling low can be a bad decision when you go by price alone.
There are many reasons why a stock’s price drops, and some of them have nothing at all to do with the soundness of the investment. It's often just a matter of supply and demand, and this is often a matter of waves of sentiment, not necessarily practicality. That’s why you might miss an opportunity if you only follow price.
The time period immediately after a stock’s price has fallen can be a great time to buy low if you've done your research into the company, and particularly if you can identify why the stock's price is low.
If all you know about a stock is its price, you might—and probably will—make investing mistakes. Basically, if a stock has had a good run up, it might be time to sell, not buy. You want to sell high. Similarly, if a stock has dropped like a rock, it might be a good time to get out. Buy rather than sell, or buy low. You won’t know what to do unless you understand and know a lot more about the company than its stock price.
Note: Always consult with a financial professional for the most up-to-date information and trends. This article is not investment advice and it is not intended as investment advice.