Buying Tips in an Unstable Market

The market is wild and crazy more than ever these days. Not only have we had a rise above 7200 in the Dow, it has actually stayed there for more than a couple of hours. So many have been asking the question (including myself), is it time to buy? I addressed this question in a previous post so I will not waste your time with attempting to answer it again. I also realized that I had written a post about how to maximize your return when selling, yet had never talked about buying. So I want to talk about how to minimize risk in this market when buying a stock.

Trying to find a time to buy may be a lot harder than trying to find a company to buy. When I talked about selling, I mentioned limit orders. Limit orders can also be used to buy. Say you want to buy GE. GE has topped $9, but you think it will fall back to $7.50. You can set a limit order for GE at $7.50 and if GE does decline to said number, the order will then process and you will be a proud owner of GE shares at $7.50. Now you not only hedged against a decline in GE, you have also capitalized on it.

The way I want to stress buying in this market, however, is via dollar cost averaging. No one has a clue where this market will be a day from now or a month from now. Some say this is a bear market rally, others say its going to stay. Should it stay and GE not fall back to $7.50, you are now looking at buying GE at say $10. If you like a company for the long run and you simply try to wait for a pullback that never happens, you could be left behind. Dollar cost averaging allows you to get in when you want and still maximize return. Say you wanted to spend $5000 on GE. You go ahead and put in $2500 when GE is at $9. If GE then goes down, you put in the other $2500 and lower the total cost so you hedge yourself from being too far in the hole before you start. If GE goes up, you can just keep you original amount in and put the rest in something else, or you can hope it pulls back later on. Either way you do not miss the boat and you get exposure to the company you want. Should it be for the long run, do no be afraid to buy at a slight premium.

Trying to figure out the right time to buy is an art. These two simple ways allow you to hedge against some loss and maximize return by buying at the lowest point possible. If you think the stock is justified by trading at a premium, do not hesitate to buy. Any simple way of lowering costs will make you cash money. Trade accordingly.