Thursday, January 12, 2012

Buy on the Dips Examples of Stock Market Conservative Investing

Stocks fluctuate during the trading day and over time. If investors look at the historical prices of almost any high volume stock, they will see that there is a reasonably substantial difference between the high and low for the day.

An even greater change is apparent when the 52 week high and low prices are reviewed. It is not uncommon to see that the 52 week low is half of the high, meaning that if an investor bought it at the right time he would have doubled his money. It also means if he bought and sold it at the exact wrong time, he would have lost half his investment.

Taking Advantage of Stock Price Moves

Buying any stock is a risk. Investors do not know where a particular stock is in the cycle. It can be at the high, low, or in between. Investors can reduce that risk by taking advantage and buying shares when a stock price goes down for reasons that are not related to the company.

For example, consider fictional stock XYZ. The opening price is $50, and from reviewing the historical data on financial websites, the stock high for the stock is often $1 higher than the low.

The investor could just buy at the open, but history shows that the price will often fluctuate during the day. The investor is better advised to wait for a dip, that is, a price decline sometime during the day, in order to secure a better price. There is no guarantee the price will decline. It may go up at the open and stay high, but if this happens, having missed an opportunity to buy is less damaging than buying early and watching the stock decline all day.

Conservative Investing and Averaging In

A patient investor can utilize this strategy over time. It may take time for the stock price to fall a significant amount, but it is likely worth the wait to get the right price.

Investors can also spread buys over several days. This will raise commissions, but the savings may be well worth it. For example, if the investor buys XYZ on Monday at $49.50, it may still decline later in the week. If it drops to $48, and the investor buys the same amount on Wednesday, his average price will be $48.75. He has averaged into the stock.

Buying on Dips over the Long Term

The real advantage in the buying on the dips strategy is over a long period of time. Very patient investors watch a stock they do not own in the hopes that the price will drop to a level worth buying.

If there is a sudden move in the stock price unrelated to the company, it will be an opportunity to buy. If the entire market drops because of a bad employment report, it is likely even a good stock like XYZ will drop in price. This is an excellent moment to buy on the dip in price.

Watching stocks closely for routine fluctuations or sudden drops in price can lead to great opportunities for stock market profits. No one wins all the time in stock picking, but patient, smart investors can increase the odds of finding winners when buying on the dips.