It’s not that investors start out to do that, but too often, they use price, and in particular price movement, as their only signal to buy or sell.
Stocks that have gone up recently, especially those with a lot of press, often attract even more buyers. This obviously drives the price up even higher.
People get excited about what they read and see and want a part of the action. They jump into a stock that is already trading at a premium – they buy high.
Traders
Experienced traders can make money jumping in and out of a stock that’s caught the public’s attention, but it’s not a game for the inexperienced and it’s not investing.There’s risk involved and tax consequences along with other issues that mean most investors should leave this activity to short-term traders.
For most investors, trying to grab a piece of the latest flashy stock, usually means paying too much (buying high).
Bad Decision
The other side of the market is when a stock has fallen; most investors may want to sell along with the rest of the market. If you go by price alone, this can be a bad decision (sell low).There are many reasons a stock’s price drops and some of them have nothing to do with the soundness of the investment. That’s why if you only follow price you may miss an opportunity.
After a stock’s price has fallen can be a great time to buy (buy low) if you have done your research on the company.
Conclusion
If all you know about a stock is the price, you may (and likely will) make investing mistakes. Remember, if a stock has had a good run up it may be time to sell, not buy (sell high). Similarly, if a stock has dropped like a rock, it may be a good time to buy rather than sell (buy low). You won’t know what to do unless you understand a lot more about the company than its stock price.Other Articles in This Series
Understanding Bid & Ask Prices
Using Trailing Stops to Protect Stock Profits
Understanding Stop Loss Orders
Market Specialists Make NYSE Work
