Buy low, sell high — the well-known wisdom of the stock market. The long-term investment approach is based on the assumption that financial markets are always going up. By buying today and selling a few years later, an investor automatically follows the basic rule of profitable trading. The best thing is that everyone can buy stocks and earn money on them.
When applied to passive investing, when money is distributed among the stocks of the entire market index, this strategy often pays off. In the case of a single stock, the exact moment of entering a position can be very important.
Let’s say an investor oneself, or following the advice of a financial advisor, was able to determine a list of stocks for a portfolio. They chose securities of reliable companies with good management, a promising market, and a confident competitive advantage. It remains only to implement the decision and buy the required number of shares at the lowest possible price. And there are several tactics here.
Methods that do not involve the choice of a specific moment for a purchase
Let’s take as an axiom the fact that an investor cannot accurately determine the extremes on the chart. Shopping at the lowest point of a downtrend is possible but has more to do with luck and intuition than with logical formalized methods.
It is possible to determine a good time to enter only approximately, starting from historical volatility and an analysis of the market situation. To make such a decision, it is necessary to have an understanding of fundamental and technical analysis, as well as macroeconomics and current trends in the target and related markets.
In this state of affairs, for some investors who do not feel the desire and sufficient skills to analyse the market situation, it may be optimal to buy a block of shares in parts at a certain frequency, for example, once every few days or weeks.
Regular purchase of shares in equal parts
When an investor wants to mitigate portfolio risks, they allocate capital across multiple shares. Then the fall of one share will cause only a slight decrease in the entire portfolio, which will be offset by the growth of other assets. This is diversification. A similar approach can be applied to the purchase of one specific stock by diversifying it according to purchase prices.
Regular purchase of shares in different parts
When the share price declines, the investor may consider investing a larger amount. Conversely, if the stock price looks too high, you can reduce the volume of regular purchases. By gradually increasing purchases against the background of declining stocks and decreasing them against the background of growth, an investor can significantly increase the potential profit.
If you are from South Africa, you can also buy stocks of famous companies. You need to devote some time to learn how the processes work. Check the Forextime blog with the most complete information about Forex trading, stocks, and cryptocurrencies.
Choosing the best moment to buy
Here are a few classic landmarks that you can rely on when choosing when to buy. They can be used both for a one-time deal and for a position set in parts.
1. Technical levels at chart extremes
Quite often, the levels of the lows act as psychological markers, where sales begin to look unprofitable, and purchases are more promising. At such points, there is a high probability of quotations’ reversal to growth. Sometimes this moment turns out to be the very long-awaited “bottom” that all investors are trying to catch.
2. Trend indicators on rising securities
Here, trend indicators should primarily be understood as ascending channels and moving averages. When a stock is in a steady uptrend, it can be hard to catch the moment when the stock looks attractive to buy. As a rule, it looks expensive all the time, and an inexperienced investor accompanies a growing stock with a sad look, not daring to open or increase a position.
3. Decrease by X% of the highs
The criterion for buying can be the percentage of decline by which the stock has moved away from its highs. This criterion can be used both for making a decision on the size of the purchase and on the purchase in general. The deeper the drawdown, the higher the investment volume can be when purchasing the next portion. Of course, this method must be combined with fundamental analysis. Otherwise, there is a risk of being in a losing position for a long time.
When investing long-term in stocks, it is useful for an investor to have not only a strategic view of the prospects of the issuing companies but also a set of tactics for more effective management of their portfolio. The methods presented in the article can be modified, combined, and adapted to your own portfolio.