You don’t need to know anything about investing to know the old adage “buy low and sell high.” This well-known phrase has been passed around for over a century. Chances are if you ask the average person what they know about the stock market, they’ll repeat these five words without blinking.
Yet buying low and selling high isn’t just a motto for all investors. It’s a simple and smart way to time your investments and make the most of your money. It’s also a good way to avoid losing money.
To buy low and sell high, there are a few things you need to know first. After all, if you don’t know what to look for, you could end up in serious financial trouble.
Stocks go up and down.
The stock market historically increases over time. To make these increases, the market has to decrease, increases, and decrease again over short and long periods of time. These fluctuations are signs of a healthy market, as nonstop increases are unsustainable.
Individual stocks act the same way. If a well-performing company decreases on the market due to lackluster earnings or increased competition, it’s not the end of the world. That company could eventually post impressive earnings in the future and make key business decisions to help grow their sales. This would increase demand in the stock, and subsequently increase the value of the company.
Also, if the stock market is down, most or all companies will likely go down, too. An overall decline in the market would decrease overall demand for stocks. Since the market historically goes up, such a decline would not be permanent.
Buying lower increases returns.
When you buy a stock at its low point, you earn the chance to make a great deal more than if you buy it at a high point. Let’s say Amazon ($AMZN) hypothetically decreases back to $900 from its current price of $1000 and keeps declining after a poor earnings report. The reason for the decline is that investors are unhappy with the company’s quarterly earnings and have less faith in them right now. Yet this lack of faith is likely only temporary, and the company will probably go back up to $1000 and beyond.
By buying the stock at a low point of $900 or below, you gain the chance of making $100 per share if/when the stock increases to $1000 and beyond. It’s not buying Amazon at IPO prices, but it’s making a substantial return on your original investment. In “investor’s terms,” buying at a low point before a stock goes back up is called “buying the dip.”
Buying higher decreases potential returns…and increases potential losses.
Amazon recently reached the record of $1000 per share, an all-time high for the company’s stock. This is awesome news for Amazon investors, as the company is growing at a fast rate. Yet buying the stock at such a high price is a bit of a mixed bag. Sure, it could go up to $1100 and beyond. It could also decrease in value and stop growing as investors question why it’s valued so high in the first place.
There’s also the fact that the market is at an all-time high, and has increased for over eight years. This is leading many investors to brace for an eventual market decrease. So, if you buy Amazon or any company now at record highs, they could come down along with the eventual market decrease. Buying Amazon and other companies when they’re below than their record high — the aforementioned “dip” — will let you make more when their stock increases than if you bought it at a higher price.
Patience is key.
Few things are more important in investing than patience. You might be antsy and want to buy a stock now as it continues to grow, but chances are that stock will come down again at some point. When the value of a stock decreases to a 52-week low — the single lowest value of a stock in a year — it might be a good time to invest.
If data supports the company is going through a temporary slump and will rebound in the future, your investment will likely increase in value later on. If said stock is in a declining industry and data shows the stock will only continue to decline over time, you might not want to invest in that stock in the first place.
Remember: there are no such things as stocks with guaranteed increases and decreases. Since you can’t predict the future, you can’t see if a stock will go up or down in the next day, month, or year. If you time your investment just right and “buy the dip,” your patience will pay off.