These days many stock market investors are anxious, particularly those who engaged in short term trading. Some of them may note that a part of their portfolio value has been wiped out. They may or may not sell but that makes no difference- unrealized gain or loss is as much a profit or a loss as the realized gain or loss. Most people keep holding to their stocks when their prices have fallen below their original purchase prices hoping that the share will somehow recover. But this depends on the prices at which they bought the share.
Buy low and sell high is the time honored principle in successful investing. It is also the reverse of what many investors particularly the short term traders 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 already gone up recently, especially those with a lot of press and rumor, often attract even more buyers. This obviously drives the price up even higher. People get excited about what they read and hear from brokers and want a part of the action. They jump into a stock that is already trading at a premium – they buy high. Short term traders buy a stock which is moving up hoping that it will move up some more. Shrewd brokers circulate rumors that some party intends to buy a large block of such and such a share. The latest share figuring in this scenario is Blue Diamonds in which E- Channeling bought a stake of 13%. Now there are rumors that the Insurance Corporation is set to buy the company. I for one can’t understand why the Insurance Corporation should enter into a totally unrelated business and be willing to pay a big premium for the share. But then it is a government corporation and their business decisions are more political and less economic or business driven.
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. Nor should clients entrust their Investment Advisers or brokers to engage in it unless they trust them completely in their judgment and realize that they too can make costly errors. Nobody can predict the market with certainty although this view is encouraged by the Crossings Rule of the Stock Exchange. There’s risk involved and 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).
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.
The writer is an economist and is the General Manager of a Colombo based stock brokering firm. You can reach him via raja.senanayake712@gmail.com
http://www.news360.lk/markets/stock-market/buying-high-to-make-profits