Buying Strategies
Buying Points
At StockBoxFinancial, we believe there are optimal buying points that help maximize your returns. The first buying point occurs when some temporary bad news strikes a firm. Things go wrong from time to time in even the best run companies. When this happens Mr. Market often over emphasizes the negatives and the company turns into an attractive opportunity. The second buying opportunity occurs when a substantial increase in profits is in a company’s short or medium term future. This can occur through the opening of several new stores or the entrance into a new market. Be careful to check your valuation metrics when considering this buying point. If the Mr. Market has also considered this surge in future profits it will be reflected in higher than normal earnings multiples for the company. If you don’t purchase at one of these buy points you can still make significant returns on your investment. You just might need to be more patient as the company increases profits over time.
Market and Limit Orders
Once you have found the right company and decided that it’s time to buy, the last step is actually placing the order for the stock. When you go to purchase a stock you have the option to use a market or limit order. When you place a market order you specify the number of shares you want to buy and you pay whatever price the market specifies when your trade executes. The disadvantage of a market order is that the stock price could jump between the time you place your order and the time the order is executed. The big advantage of the market order is you always buy the stock.
With a limit order, on the other hand, you specify the price and if the market reaches that price (or drops below it) then your order is executed. The huge disadvantage of the limit order is that it’s possible that your order never will be executed.
As Philip A. Fisher states in Common Stocks and Uncommon Profits, it’s best to use market orders. If you are planning to own a stock for many years and are shooting for returns in the thousand of percents then paying an extra ten or fifteen cents per share won’t matter.
Let’s recap an example from Mr. Fisher’s book. In that book Fisher states that one of his clients places a limit order for 100 shares of a certain stock at $35.00 while the stock closed the previous day at $35.50. The limit order used by this man would have saved him $50 in comparison to the market order. The stock price then rose to over $500, but the stock never dropped low enough for the man’s limit order to be executed. In his attempts to save $50 he missed out on making over $45,000. When you find a good deal, use a market order to ensure the order is executed. Plus, you will save yourself all the anxiety that occurs while you wait with a limit order.