When to Buy and Sell Stocks

The most common rule of thumb that most financial advisors give is to buy at a low price and sell when the price is high. However, most investors do just the opposite.

The major mistake that investors commit is to observe price signals and to base their stock investment decisions primarily on them.

What is more, a rise in the price of a stock, which has been accompanied by a lot of media attention, means that other investors will also purchase the stock. As a result its price will rise further. However, you may be too late for the "hot" stock since many others have also understood about it and the price at which you will purchase the stock may have already increased.

In order to make profits from jumping from one stock to another you should gain the appropriate experience and flair. Additionally, such movements from one stock to another can be classified as anything else, but not investing.

These short-term trading activities have not only their risk implications, but also their tax effects.

Let's now consider the case in which the price of the stock has fallen. In such a case you may be influenced by the rest of the market's behavior, which jumps into selling the no longer profitable stock.

In this way your decision of selling the stock will be guided by the low price. However, there are other factors that may influence the lower stock price. Some of these factors relate in no way to the reasonability of the investment. Hence, using price signals as the basis for your stock selling decisions may be misleading. Additionally, once the price has decreased this may mean that it is the right time to purchase stocks of the company, but only after you have done the required preliminary research.

Final Piece of Advice

Sound stock decisions should be made on the basis of thorough company knowledge, not just on the basis of the price of the stock. A rising price most of the times means that the time to sell the stock is nearing. On the other hand, a falling price may signal that the time to purchase stocks is coming.

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For knowledge we can highly recommend you subscribe to the The Wall Street Journal.

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