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Stock Strategies
Market Timing Strategy of Buying Stock
by InvestorGuide Staff (Write for us!)
(Click on the links within the article to get definition of that word)
If you ask around long enough, you are bound to hear just about every conceivable system possible
used for playing
the stock market. Some people just point to the history books and contend that the market has averaged growth of
around 11 percent a year when you go back 4 decades - therefore, it makes sense to buy the stock and hold it.
Eventually, "buy and hold" stock strategists contend, you cannot help but make money on your investment.
Others try to pick "value stocks" which happen to be performing poorly today but which should be able to turn things
around in the near future and thus greatly raise stock prices. Market timing is still another stock buying strategy
which looks at a number of complexfactors when purchasingequities.
Market Timing Fundamentals
Many people do not have the ability to be patient for years at a time without touching their money. For people not
looking to sit on their stocks as advised in the standard "buy and hold" strategy, market timing is a good option
to consider! This is because market timing strategies for buying stocks do not advocate buying stock and just sitting
on it for year after year. Indeed, market timing investors do not wait out the lows and sell only when
prices are sufficiently high to make a decent return on investment - they avoid the lows altogether and only aim to
sell when prices are at their peak.
At the heart of the market timing strategy for buying stocks is a deeply-held belief that stock prices are
predictable. Going even further, those who believe in market timing also assert that trends in the broader markets
can be applied to more specific ones, and specific stocks, in order to accurately predict pricefluctuations.
A large amount of analysis and research is
used to predict market fluctuations and the prices of specific stocks.
Two primary forms of analysis, fundamental and technical, are favorites of market timing strategists and are used
together in many cases to help predict the prices of specific stocks.
Technical analysis does not look at the management team, market, or any other subjective matter.
Instead, this method of analysis tends to prefer looking at historical prices for stocks of specific companies -
and uses that data in conjunction with other variables of buying in order to make a decision.
The end result is to be able to predict future patterns of prices on specific stocks.
However, no proof has been provided illustrating any link between historical prices and how they perform in
the future. While the market timing strategy does not make exclusive use of one method, a mixture of both or
one or the other investment strategy is
used to predict future stock prices.
Pros of Market Timing Stock Strategy
There are certainly a large number of investors who swear by the market timing strategy for buying stocks.
Such people tend to be big fans of technical analysis which seeks to draw correlations between current market
conditions and those which affected historical stock prices. It is not uncommon for a great deal
of spreadsheets, charts, and graphs being generated when trying to employ market timing as strategy
for purchasing stocks. All of these are generated in order to identify any potential trends in the market that
may indicate a significant shift in share prices. However, aside from looking very busy and investing a lot of
effort, there are a few pros to this investment approach for stocks.
Cons of Market Timing Stock Strategy
The most fundamental problem with the market timing stock strategy is that it remains pure fantasy, at least
according to most investment experts. After all, if anyone truly could predict the rise and fall of stock prices
with any degree of certainty, then we would all be billionaires because such a strategy could be documented
and replicated. But even Warren Buffet does not ascribe to this approach and neither do most
investment professionals. There are almost an unlimited number of market and world variables that
may ultimately affect stock prices.
Another big negative with the market timing strategy is the fact that it generally involves a large number
of transactions, especially when compared to the buy and hold method. Buying and selling all those stocks
requires commissions which can start to take a larger and larger chunk of profits - especially when the market
doesn't react in the way you predicted. In order to really be effective, a market strategy tends to require a
larger capital investment. This allows the investor to purchase a larger number of stocks and thus not need to
make as large of a return on the sale price in order to still make a profit.
The
differences between bid and asking price can also eat into the profits of a struggling market timing
investor - also known as the bid/ask spread. An investor may bid a price for a certain stock and be told that
it is available, but by the time the actual transaction is made - the asking price actually charged by the
exchanges may be higher. Again, the difference may seem insignificant but it can make a large difference between
a good and a bad day in the life of a market timer.
Although market timing is an approach that millions of investors pursue every day on exchanges around the world,
the truth is that it tends to carry more risk than reward. With the erosion of profits due to transaction fees
and the bid/ask spread, market timing tends to require larger investments of capital in order to be worthwhile.
While no investment strategy for buying stocks has proven to be risk-free and a sure thing,
there are other options that tend to be safer investment alternatives.
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