Tuesday, October 28, 2008

Buy/Sell Stocks in increments

Do you think you are good at predicting the market? If you really can, you may not be reading this blog. You may be spending your time in the beaches of Hawaii, giving yourself an early retirement. Yes. You should be a billionaire by now, if you can really predict the market peaks & bottoms. But, the reality is ... most of us are not good at predicting the market. So, what should you do if you are an investor? When should you really invest? What is the strategy you should follow?

Say, for example, you have $5000 to invest in stocks. You wake up one fine morning and dump all the money into a stock. The next day, the stock value drops by 10%, the following day it drops by another 10%... what would you do? You keep hitting the "Refresh" button several hundred times a day for the price to come up.

Let me propose a strategy for you. This has worked for me. If you have $5000 to invest, buy stocks for $1000. Wait for a week or a month (depends upon whether you are a long term or a short term investor). See if the stock continues to hold its value. You can throw another $1000 into the same stock after some time. If the stock keeps going up, it is well and good. If the stock lost some value, it is a nice opportunity for you to average out. The drawbacks of this approach is

(a) you may have to pay the broker for each trade that you make. However, the price that you pay is very very less when compared to the loss that you would've encountered if the stock were to drop 5 or 10% of its value.

(b) occassionally, you may have to miss some opportunities. Especially, when a stock goes up by 10% or so every day. But, such opportunities show up only very rarely. You shouldn't be too greedy :)

The same strategy would also work when selling stocks. Sell in portions instead of selling all of them in one go.

Always, Buy or Sell in increments.

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