How Do You Buy Shares?
November 7th 2006 15:31
How do you buy shares? How does anyone buy shares? I'm convinced that most people, whether institutions or individuals, buy on trends. They basically look up a chart and if they spot a trend upwards they buy.
Not surprisingly, a collaborator of Business Week Online two weeks ago considered stocks like Amazon.com and Yahoo.com, at Price to Earnings of 85 times, still a buy.
Obviously, if the spotted trend is downwards, the investor will probably panic and immediately sell.
This strategy of buying when the price is going up and selling when it’s going down can have its problems. Let's see:
If you buy when the price is going up, then you have to compete with everybody else since they will all be all trying to buy as well. The price may go up substantially before you buy and then the likely anguishing question for you is whether it will continue to go up or will fall.
In any case, considering that you spotted a great trend and bought, the return on your investment, depending on how much more the price will still increase, may not be very great. And if the Price to Earnings is already high your risk won’t be small.
Now suppose the stock market has a downfall. What do you do?
I suppose you rush to your phone or to your PC and put an at market sell order. This could bring various problems: in the crash of 1987, one of the problems investors faced was just that the lines to their brokers were jammed. This could mean that the price could fall substantially before you could put a sell order.
Then, if falling prices are your problem, you will have the dilemma whether you hang on to your stock or whether you sell it. And, if you are borrowing on a margin loan, you may have to put up some extra collateral.
In both situations of buying when the price is going up and selling when it falls you are trying to out beat everybody else.
This might reveal to be a monumental task and the gains from it may not be very fat. Institutions use computers to advise them of when to buy and when to sell and in the crash of 1987 some of them sold almost their entire portfolio of billions in one day and bought it back the next.
There is another problem: every time you make a gain you have to pay Capital Gains Tax and if you buy and sell very often three consequences will verify: one, you may have a lager CGT bill; two, you will have to pay added broker’s fees and, three, the money left over to reinvest will be lesser.
If you do not have to sell and instead hold on for the long run, the CGT portion will be compounding for you.
I think the reason why most people invest on the style mentioned above is due to herd mentality which, with respect, simply means that most people do what they see others doing.
If everybody is buying, buy also; if everyone else is selling, sell also. And this because, since most people are doing it, they must be right.
Unfortunately for me, I see no wisdom in this.
Not surprisingly, a collaborator of Business Week Online two weeks ago considered stocks like Amazon.com and Yahoo.com, at Price to Earnings of 85 times, still a buy.
Obviously, if the spotted trend is downwards, the investor will probably panic and immediately sell.
This strategy of buying when the price is going up and selling when it’s going down can have its problems. Let's see:
If you buy when the price is going up, then you have to compete with everybody else since they will all be all trying to buy as well. The price may go up substantially before you buy and then the likely anguishing question for you is whether it will continue to go up or will fall.
In any case, considering that you spotted a great trend and bought, the return on your investment, depending on how much more the price will still increase, may not be very great. And if the Price to Earnings is already high your risk won’t be small.
Now suppose the stock market has a downfall. What do you do?
I suppose you rush to your phone or to your PC and put an at market sell order. This could bring various problems: in the crash of 1987, one of the problems investors faced was just that the lines to their brokers were jammed. This could mean that the price could fall substantially before you could put a sell order.
Then, if falling prices are your problem, you will have the dilemma whether you hang on to your stock or whether you sell it. And, if you are borrowing on a margin loan, you may have to put up some extra collateral.
In both situations of buying when the price is going up and selling when it falls you are trying to out beat everybody else.
This might reveal to be a monumental task and the gains from it may not be very fat. Institutions use computers to advise them of when to buy and when to sell and in the crash of 1987 some of them sold almost their entire portfolio of billions in one day and bought it back the next.
There is another problem: every time you make a gain you have to pay Capital Gains Tax and if you buy and sell very often three consequences will verify: one, you may have a lager CGT bill; two, you will have to pay added broker’s fees and, three, the money left over to reinvest will be lesser.
If you do not have to sell and instead hold on for the long run, the CGT portion will be compounding for you.
I think the reason why most people invest on the style mentioned above is due to herd mentality which, with respect, simply means that most people do what they see others doing.
If everybody is buying, buy also; if everyone else is selling, sell also. And this because, since most people are doing it, they must be right.
Unfortunately for me, I see no wisdom in this.
| 29 |
| Vote |
Subscribe to this blog
