Let's say you are interested in this one company. You read its annual report, like what you see and your calculation indicates that the stock is trading way below its fair value. You are excited. It is time to buy! Hang on for a second. There are several techniques of buying stocks out there. Some are better than the other. Let me explore several useful ones.
Buy all at limit price. Assume that we have done our research and we want to invest $ 2000 to buy stock XYZ at $ 12/share. We can do this by setting a limit order of $ 12/share to buy 166 shares of XYZ. The advantage for this method is that we will not pay more than $ 12 for our XYZ share. If you use market order, instead of limit order, XYZ might run up to $ 13/share and execute your order at $ 12.50. Fifty cents may not sound a lot, but in this case, you just saves $ 83 for using limit order. Any better methods? Check out this next one.
Buying half at $12. Buying half when it drops. Stock market is volatile. It goes up and down due to various reasons. In this case, we set a limit order to buy $ 1000 worth of XYZ at $ 12/share. When XYZ drops lower, and if you think that the reason that you initially bought it is still valid, then you can buy more XYZ at a lower price. If XYZ drops by $ 1, you already save $ 83 off the bag. What else is there?
Dollar Cost Averaging (DCA). With DCA, investors normally buy a specified dollar of stock at regular intervals. In this case, you can decide to invest $ 500 monthly in XYZ stock. If the XYZ stock falls, you can buy more shares next month. If XYZ stock rises, you would buy less. But it is ok. You already made money on XYZ stocks that you bought at a lower price.
Which method is the best? There is no clear cut answer on this. Personally, I will never use market order when buying a stock. Commission for buying a limit order is not as expensive as it used to be. My favorite methods is by buying half position initially and then add half more when the share price drops. If you have done your research and you feel that $ 12 per share is a good buy, then why won't you buy some more if it goes down to $ 10? Just make sure that the fundamental remains the same when the stock drops.
While knowing how to initiate your position is important, I am more inclined in focusing on how to calculate fair value of a stock. This is where the bulk of your investment return comes from.
Curious about fair value calculation? At http://www.noviceinvesting.com, these analysis are shown for free. No String Attached. No fee to be paid. You just need to put some time and effort into it. Honest.
Hari wrote regular commentary about stock investing. He is always on the lookout for stocks that match his buying criteria. You can share your ideas or questions in our discussion board. He would be more than willing to assist.
When you become interested in a stock or mutual fund... Read More
Checked your 401K lately? Going back to about a year... Read More
An insane person cannot evaluate an insane evaluation system.As you... Read More
It looks like the market is ready to start up... Read More
If you're like many investors who squander those small dividend... Read More
Disclaimer: Please note that I do not necessarily purchase, own,... Read More
TOO OFTEN, INVESTORS SIMPLY CHOOSE TO follow the crowd. This... Read More
Recently I watched my favorite football team lose a vital... Read More
The Shadow knows. Remember him? It seems a shadow has... Read More
How is it possible that trash Companies are posting less... Read More
Are hedge funds a suitable investment for you? Hedge funds... Read More
AS BUILDERS BEGIN WORK ON THE FREEDOM TOWER in New... Read More
Regardless of the fact that the world's stock markets have... Read More
As an investor you will want to check out any... Read More
Because there are so many stocks that are NOT paying... Read More
Ever done any whitewater rafting or canoeing? Long periods of... Read More
If you don't know what a Roth IRA is then... Read More
Ever wondered what is a mutual fund? A mutual fund... Read More
A PEG ratio cannot be used alone but is a... Read More
Among the largest forces that affect stock prices are inflation,... Read More
How many times has this happened to you? You're at... Read More
The thinking process of the brain relating to the... Read More
If you don't know where you are going any road... Read More
I have a 2-car garage. There are nice shelves on... Read More
Just about now everyone is confused as to which way... Read More
It looks like the market is ready to start up... Read More
Even if you don't own any of their stock or... Read More
If you don't know what a Roth IRA is then... Read More
If you have been watching the stock market at all... Read More
If you are fed up with early redemption charges and... Read More
I often play a little game with myself when I... Read More
If you are going to be a winner in the... Read More
When it comes to mutual funds, there is a lot... Read More
One of the main reasons many of us get into... Read More
Are you one of those many people who dread reading... Read More
It depends on your level of understanding of the market... Read More
The ABC's of Stock Trading SuccessStock trading success...why is it... Read More
For weeks, no, months we have been bombarded with nothing... Read More
Have you bought any mutual funds this year or late... Read More
Did you run out to buy that duct tape yet?... Read More
At some time in your life you have been on... Read More
Wall Street has been preaching for years and years to... Read More
Ever turn down a street, get half way and suddenly... Read More
With the stock market stubbornly refusing to settle down and... Read More
Now where have I heard that before? I know. It... Read More
Why? Because I am going to shatter your conventional wisdom... Read More
(1) CHK stock price $16.74, NAV $32.5CHK is my favorite... Read More
Let's discuss commodities; with the latest Enron situation, it is... Read More
Humpty Dumpty had a great fall and all the King's... Read More
We keep hearing about this bear market and that the... Read More
Stocks & Mutual Fund |