An Investing Secret - Why Buy And Hold Will Not Produce The Results You Think They Will
The business of stock markets is based on the buying and selling of a certain amount of ‘inventory’. The companies offering their stock to the general public desperately want you to purchase their shares. They also want you to hold on to it for a very long time as this helps the shares retain its value. The thing about buying without selling when dealing with the stock market is like driving downhill with no brakes. In order to create some brakes for your stock you should have a stop-loss order on all stocks that you purchase.
Why Buy And Hold Will Not Work
A stock-loss order is basically a set of demands for the sale of your shares at a certain point-generally when they fall below a certain price. This isn’t a guarantee against loss but it is a very important line of protection. You can choose the stock-loss figure based on a percentage drop in the price or even certain patterns. Some brokers will even set your stock-loss price higher as the value of your stock rises in order to protect the maximum possible profit on your behalf.
Folks who comment that the buy and hold strategy of investing works, will simply point to Warren Buffet. The world’s most effective investor has the good name of someone who lives and breathes the buy and hold strategy. Unfortunately, its not completely correct. Unlike you and I, Mr Buffet is in a position to buy a controlling interest in the companies that he is investing in. This gives him the power to help pressure and make important decisions about who will make the decisions in the backrooms of the company. As a stakeholder of the company, he has the ability to make companies more effective by removing dead weight. Any decisions that the company makes that require stakeholder consent will have to be consented by Mr Buffet in order for them to go through. So, unless you are able to purchase as many shares as him, you’re only option is to sell if you don’t like the direction the company is moving in.
When public companies declare bankruptcy it is quite rare that stockholders will receive any kind of compensation whatsoever. Stop-loss orders are a great way to prevent this from occurring.
There are some ‘loss-recovery’ methods that can be taken. The best thing you can do in order to protect your investment is to put a stop-loss order on the stocks your purchase. You can even select the percentages at which you would like the order to kick in. If you are hoping to protect your investment a stop-loss order is the most likely method for doing so.
Here’s a great saying that should help you remember the important of a stop-loss order: “If the smart money has sold and moved on, what type of money still owns the stock?”
Tags: Stocks and Bonds