Buying and selling stocks

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Predicting the prices of stocks is the most challenging task for any investor. The ideal way is to buy at the lowest price and sell at the highest price. Knowing the lowest and the highest price is just a mystery that cannot be solved with precision. This is why buying and selling stocks at the right time is a challenging task. Note that for an investor who is in it for long term, short term price changes do not make significant differences.

In this article we will discuss important things to consider when you are buying and selling stocks. We make an assumption that an investor is rational, that is he/she is motivated to gain positive returns from his/her investment in shares. You may find our post about the basics about investing in shares useful.

When to buy stocks

This is usually the starting point of investing and you have to do it right to stand a chance of gaining positive returns. It is advisable to buy the stocks you understand and know. You cannot buy a valueless stock only because it is cheap – this is the easiest way to lose money on the stock market.

Profits are made in the buying but not in the selling.

Robert Kiyosaki

Buying strategies you may consider after selecting the best stocks to buy:

1. Buy when the share price is low and if there is a chance that the share price will rise again in the future.
2. Buy at any price provided that expected returns are high that is buy as long as the stock has great potential.
3. Reduce the impact of risk or volatility of share prices by buying at regular time periods. For example you can buy R 1000 worth of shares every month from a company regardless of the share prices. This strategy is called Dollar Cost Averaging.
4. You can reduce your overall cost price for the shares you currently own by buying additional shares when the shares in your portfolio drop in value below your average purchase price. This strategy is called Average Down. Suppose you bought 100 Implats (IMP) shares for R 120 per share last month but the share price drops to R 100 per share. Suppose you are confident that this drop is temporary and you buy 100 more shares at R 100 then you significantly reduce your cost per share from R 120 to R 110. If the share price increases to R 115, you will get a 4.5% profit but previously this could have been a 4.2% loss if the average purchase price had remained at R 120.

When to sell your shares

At some point in time, you may need to sell your shares but the idea is to keep the shares as much as you can. Patience often pays more hence you may need keep invested for a long time. The worst thing that you can ever do as an investor is to let fear and greed dictate your selling decision. Both of these have one result – you lose your money.

The following are the strategies that can guide you when you want to sell your stocks:

1. Sell when the share price rises to a price that is ‘perceived’ difficult to sustain. Please note that it is often difficult to determine if this sudden jump in share price is temporary.
2. You can sell the stocks that you bought by mistake. This can significantly cut down your losses in the long run.
3. Sell when your target of returns is reached. For example you can make it a policy to sell when your return on investment exceeds say 50%. You ignore the fact that your returns may exceed the 50% threshold if you wait more. You can do the same strategy to sell when your shares are losing value. That is, you can cut your losses when your losses exceeds a threshold that you define. For example you can sell when your shares lose more than 30%. This strategy is called a Stop Order.

Conclusion

In conclusion, making money on stocks can depend on the buying and selling times. However the most important step is to choose a good stock before you decide on the buying time. Time in the market is very important. Buying and selling stocks can be rewarding if you have the patience, consistency and also if you are a risk taker. In most cases a long term investor will win the race.