Buy-up-to Prices: Why The Secret to Selling Stocks is in the Buying…

Every time you buy a share your aim is to eventually sell it for a profit.

That’s the same whether you use technical analysis or fundamental analysis.

In order to sell at a profit, you need to know the single most important thing about selling.

It’s not difficult to find that important thing. You just have to look in the right place.

Trouble is, most investors don’t know where to look…which isn’t surprising, because it’s not where you’d expect to find it…

One of the most important factors when it comes to making profits in the stock market isn’t about figuring out the best time to sell.

It’s not about trying to catch the top of the market.

It’s not about ‘buying the rumour and selling the fact’. (That’s where shares can rise on the rumour of good news and then fall as the fact behind the rumour typically isn’t as exciting as the rumour itself.)

One of the biggest factors to making profits when selling stocks is all to do with the buy price…

A Common Investing Mistake

If you’re a new investor you’ll soon work this out as you gain more experience.

If you’ve bought and sold shares for a few years you know exactly what we’re talking about.

Many investors think all they have to do is buy a good stock at any old price and they’ll make a profit – guaranteed. This attitude is widespread among small-cap investors.

And we get their reasoning. Even so, we’ve done our best to educate subscribers of our Australian Small-Cap Investigator service about the importance of not overpaying for a stock.

It’s why we introduced ‘buy-up-to’ prices for each recommended stock on the Australian Small-Cap Investigator buy list.

We’ll explain ‘buy-up-to’ prices in a moment. The good news is it’s a simple approach that anyone can use and it’s easy to follow. But why should you use ‘buy-up-to’ prices?

The urge to overpay for a stock is common among small-cap investors. The simple reason for that is small-cap stocks are super risky.

If you punt on a 20 cent stock, there’s a chance the stock could rise to 50 cents, 80 cents or even a dollar or more. So when you’ve got the potential to make a 400%-plus gain on a 20 cent stock, what difference does it make if you pay 25 cents?

Or heck, if it’s going to climb to a dollar, why not pay 30 cents or 40 cents? If you pay 40 cents and it goes to a dollar you’ll still bag a 150% gain – that’s good by anyone’s standards.

Fact: if You Overpay You’ll Lose Money

Perhaps you’re starting to see the problem with that attitude. After all, if you take it to the ridiculous, why not pay 90 cents? If it goes to a dollar that’s still better than a 10% gain in just a few weeks.

The reason you shouldn’t over-pay for a stock is that nothing is ever certain with stocks. We may think a 20 cent stock is worth a dollar, but the rest of the market may not.

The rest of the market may think the stock is only worth 40 cents. If you’ve paid 20 cents and the stock ‘only’ goes to 40 cents, you’ve still doubled your money…even though you had hoped it would go to a dollar.

In contrast, if you’ve paid 40 cents or more and the market only values the stock at 40 cents then you won’t make a bean. In fact, you’ll probably lose money.

That’s why discipline is important when you buy a stock. It’s why we put a maximum buy-up-to price on all the stocks we recommend in Australian Small-Cap Investigator.

We make it clear to our subscribers in every monthly report: if the stock trades above this level then DO NOT buy the stock. We spell it out exactly that way, in bold.

Be a Patient Investor

In short, you’ve got to understand that one of the biggest factors involved in profiting from stocks is to ensure you don’t pay too much when you buy the stocks.

Many new investors soon work this out through experience. Others keep on making the same mistakes and never learn. They soon become disillusioned with the stock market and assume it’s the market’s fault, not their fault.

Remember, there are around 2,000 stocks listed on the ASX. If you miss out on one opportunity, don’t chase it and pay any old price. Stay patient. That way, another opportunity will come along…and who knows, it may even be a better one.


PS: As far as patient investors go, Vern Gowdie is right up there with the best of them. Vern says the entire stock market is over-priced right now and the last thing investors should do is buy stocks…not until they’ve fallen considerably from here. You can check out Vern’s rationale for his analysis here…

From the Port Phillip Publishing Library

Special Report: GET OUT & STAY OUT 

Australian Small-Cap Investigator:
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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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