As the stock market zooms upwards one day, then falls the next, you have two choices; either wait on the sidelines until the dust settles or capitalize on the market swings. In a market determined to bounce between DOW 10,500 and 12,500, you can still make money, maybe a lot. But, as my real estate friends say, ‘there’s no cure for over paying’.
Here are five ways to buy stocks and make money in a volatile market.
- Limit Orders First, a stock buying must, regardless of market conditions. Always specify a target buy price for your stock purchase. Never use a market order. Never. I know, it costs another $5.00 or so, but on a 100 share purchase of a $20.00 stock, that amounts to .25%. Your stock will gyrate that much ten minutes after you buy it. But if you buy at market, especially small stocks, you could easily spend $100.00 or more, needlessly. And the strategy below can save you even more, but you must use limit orders.
- Buy in Increments The problem in a volatile market, of course, is when to buy. A cheap stock today, maybe even cheaper tomorrow. You can’t know, and neither can anyone else. But, it’s safe to say that after a significant decline, like the one we’ve just experienced, you have a good place to start. Don’t buy in one lump sum. Split your purchase into thirds or fourths and establish an immediate position. This helps you overcome the biggest obstacle facing the amateur investor, fear of pulling the trigger. If you wait until you feel comfortable about the market’s direction, you’ve missed the best opportunities. That’s why hedge funds use machines to execute their investment decisions, keeping their emotions from getting in the way. If the stock you want to buy falls more, invest the next portion of your position. If it rises, use the strategy I outline next.
- Good Until Canceled Orders Don’t chase a rising stock, not in this market. The advantage you have over the professionals, is that you don’t have to buy anything. Check the six month or three month chart of the stock you want to buy. Pick a price at or below the lowest price shown in that chart and place your order at that level. Use a “Good Until Cancelled” order and forget about it. Let modern electronic trading work for you. When the market falls again, as it surely will, your order will execute without your having to do a thing. Remember, only commit the next increment of your total position. After the order executes, pick another price target and repeat. Be patient.
- High Volatility – Lower Price Afraid of investing in a wild market? Here’s a simple strategy. The greater the price swings, the lower you price your order. You stand a good chance the market will flash crash to some juicy level and you’ll have picked up a bargain in the rubble. For example, if the market is bouncing around 1% a day, I’d put in a bid at 2% to 5% below a stock’s lowest, near-term closing price. Definitely lean toward a larger discount for high beta stocks (those with volatility greater than the general market). For a market with a daily swing of 2 to 3 percent, I’d bid at least 10% below a stock’s lowest, near-term close. True, you may not get many fills, but when you do, you’ve increased the odds that you’ve bought at a price that can make you money.
- Forget Round Lots Buying shares in increments of 100 is so yesterday. I’ve never had a problem buying and selling an odd number of shares. Buy as many shares as your strategy dictates.
- Sell Something to Buy Something This is an especially difficult discipline that the pros absolutely observe and the amateurs ignore. Unless you have unlimited funds, force yourself to weed out the losers to fund the winners. For every stock you own, ask yourself if it has as much or more upside potential as the new stock you want to purchase. If the answer is yes, why are you buying another stock when the old one is better? That doesn’t make sense. If the answer is no, then dump the old stock and put that money into the better investment. Neither the length of time you’ve owned a stock nor what you’ve paid for it has no bearing on its current investment potential. Every one of your stocks has to justify your continued ownership. If it doesn’t, dump it.
Follow these tips and you will come to appreciate market gyrations for what the are, a bargain buying opportunity.