How to Use Price Limits When Investing In Stocks In a Volatile Market

When investing in stocks, there are several things to consider. First, volatility is always present in the market because of what we call “sector rotation.” What that simply means is that sometimes the biotechnology sector is the darling of Wall Street and sometime it isn’t. For example, at the moment there is a great deal of volatility in the energy sector. Other times, volatility affects the entire market, as to what occurred in August, when in one day the market opened over 1000 points down. As an investor, you have to be prepared for both types of volatility. If you are currently investing in stocks in the energy sector, you have seen a significant drop in your stock prices. Long term investors ignore the day to day volatility in their stocks. That doesn’t mean that you shouldn’t take profits from time to time, but if you are a dividend investor, you can sit back, collect the dividend, and wait for the sector or market to come back.

As an Investor, How Can I Take Advantage of Investing In Stocks When They Are on Sale?

You decide what you want to buy and then, what price you want to pay for the stock. Is the stock price down 10 percent or 20 percent? If so, determine what the low for the stock price was and when did it occur. But you can’t just buy a stock because its price has dropped. You have to know why. Is the company in trouble because it has lowered its earnings going forward? Remember that the energy sector has lowered its future earnings, but some of the companies in this sector will actually benefit from other companies that are not as financially solvent. So a company’s future earnings are only one measurement. Some of you, like I did, may have taken advantage of Labor Day sales. You had done your research and knew what you wanted to pay. If the price was right, you made a purchase. Well, the same rule of thumb applies to the purchase of stocks.

When Investing In Stocks, Know How to Use Stock Price Limits to Your Advantage.

What is a price limit? It is the price you want to pay for the stock. You can either put the price limit in for just a day or for a period of time, depending on your time frame and what else is going on in the market. Sometimes you will put in a price that is too low and it may not be executed. If that happens, you may have to raise your price target or just decide that you want to move on and purchase a different stock. Price limits can potentially prevent you from paying too much for a stock. However, even if your stock price is executed, the price can still decline.

Don’t get caught up in the emotion and turmoil of either the sector or market. Know what you want to purchase and try to avoid making a stock purchase as a market order. Markets move very quickly so you want to use price limits.

For personal financial advice regarding using price limits to your advantage and other strategies on investing in stocks, Let’s Talk.