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dated 18 January 2007
If you are acting on price alone in your portfolio decisions, you may be making a mistake. Buying low and selling high is the cornerstone of successful stock investing. However, most investors aren't doing it the correct way.
Too often, investors use price and the movement of the price as a sign of whether to buy or sell. Stocks that have gone up recently tend to attract even more buyers, which drives the price higher. While experienced traders make money jumping in and out of a popular stock, it isn't really investing in the stock market. And it definitely isn't for the inexperienced. Most investors aren't looking at the risk and tax consequences involved in this type of trading.
When a stock is falling, most investors want to sell and cut their losses. However, if you go by the price alone, you could be making an unwise decision to sell low. There are many circumstances that can cause a stock price to fall, and many of them are just temporary.
For example, these events could cause stock prices to change their direction:
* Inflation
* Interest rates
* Earnings
* Energy prices
* War
* Fraud
* Domestic political unrest
* Unknown investment decisions by stockholders
* Company news
* Industry news
Once the market corrects itself, the stock could just go back up. If you follow price alone, you may miss out on a good return. This is why you must know the company.
In fact, when a stock's price has fallen, it may be a good time to buy. But you have to do your research into the company first.
If all you know about a company is the price of the stock, you are probably making a big investing mistake. Remember, there are many factors that should be considered when deciding whether to buy or sell a stock. If the stock has had a good run, it might be time to sell it and take your profits. If a stock is has dropped significantly, you might look at the situation and decide to pick up more of it.
I like to point out that all stocks that go up won't stay up forever and stocks that go down will not continue down forever. However, they may not bounce back either. The thing is -- the stock market is full of uncertainty. You never know. This is why you set investment goals, risk levels and you research before you make a move. Don't lock your mind into the future of a stock based on the price movement it is currently taking without looking into the company.
You have to understand more about a company than just the price of its stock. Run the numbers and see what price is a good price for the company's stock. If it is overvalued, you don't want to purchase it. Undervalued could be a good thing if you believe the market will begin to appreciate its value. |
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