Hello again. Last time in this blog, we began a new series on the seven worst stock market investing mistakes that you can make when investing.
Now that you’re sufficiently armed with a great deal of knowledge about the markets and Investing in general, you need to know how to safely employ that knowledge. Knowing about these common blunders should help you to avoid some costly mistakes.
Investing Too Early
The mistake we’re going to talk about today is Investing too early in a falling stock. It’s very often the case that when the price of a stock plummets, you’ll see some intrepid investors buying it up with the rationale that it has nowhere to go but up. Sometimes they’re right. But sometimes, they’re horribly wrong!
Stocks of this type are often called “falling knife” stocks because it’s similar to what happens when you drop a knife. Your reflexes sometimes cause you to reach out and grab the falling knife before your common sense can tell you otherwise, and as a result, you get injured.
The problem here is that when the news of a plummeted stock first breaks, not all the damage is yet done. Many times it will happen that when other investors hear the news, they’ll quickly grow upset and sell off their own stock, resulting in the stock plummeting even further. If you had already bought into it, you’d be quite upset.
Strike When The Time Is Right
Instead, exercise some patience when a stock plummets. If you invest too early, you’re only cutting into your potential to make money, so learn to judge exactly when the stock has truly hit “bottom”. This is done by learning to comprehend something called the “selling pressure” of a stock.
You have to observe not just the activity and price of the stock, but also the rate at which shares are being sold, and how quickly the price is dropping. Don’t jump in while the rate it still high; when it’s truly bottomed out, the rate of sell will taper off, and then is the time to strike with your Investing.
See you next week for part 3 of Stock Market Investing mistakes.
Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 – 2009
{ 3 comments… read them below or add one }
This is really simple, but neat advice! The analogy of the falling knife is spot on as an explanation.
I presume the other part of the equation is to thoroughly examine other aspects of the company whose stocks are falling – management qualities, assets, cash held and so on. If it has a solid base of assets etc then the risk is lessened.
Hi Sean,
I like the ‘falling knife’ name for these stocks as it rings really true to me. Before I read this post, I would have thought that buying falling stocks; depending on the reason for the drop; would be a great idea.
I need to learn how to work out what the ’selling pressure’ is of a stock.
I too like the falling knife analogy. This is also good information as too often people panic and react to the situation. Most people want to stop the pain they feel or remove the pain somehow and stop feeling anxiety so they dash out of the situation without thinking of the damage they may be doing.
It’s great training to just allow the knife to fall and land.. as long as it isn’t on anyone or anything like the cat or dog.