Why Do We Buy High And Sell Low

by Joseph Palmer
 

Every investor knows the phrase "buy low, sell high". What that means is that it is desirable to buy a stock when it is selling for a low price and then to sell it after the stock goes up. Buying low and selling high is how you make money in the stock market. Why is it then that there is such a temptation to do just the opposite: buy high and sell low?
 
Why is it so much easier to buy high and sell low? Stocks are so different from other everyday things. When you go shopping for clothes or electronics and you see something that is on sale, you are more apt to buy it. A sale is a good thing for most merchandise. If a jacket was $120.00 yesterday and $100.00 today, it is still the same jacket but now you are more likely to buy it because of the price drop.
 
People who buy stocks seem to have a different mentality. When the stock market is on the rise and stocks keep getting more expensive. investors have the tendency to want to jump in so as to not miss the boat. When a stock was $60 a month ago and now today is at $70, many investors are actually more inclined to buy at the higher price for fear of missing out. Even though the stock is more expensive now than it was a month ago, some investors can't wait to buy at that higher price!
 
Conversely, a stock that is going down is on sale from the price it was a month ago. It is like the jacket that you were more inclined to buy and yet most investors find it more difficult to buy that stock at the "on sale" price. They fear that because the stock is lower and continuing to go down, the value of the company must be lower. Sometimes that is correct and sometimes it is not. With the herd mentality though, many investors get swept up in doing what everyone else is doing; buying when the stock is high and selling when it is low.
 
In my experience, every time the stock market has dropped a significant amount, as it has this year in 2008 so far, if I would have bought my stock picks at the reduced prices, I would have made money. Unfortunately I am like most other people and have found that buying stocks in a down market is a very difficult thing to do.
 

About the Author

Please visit my site Stock Market For Beginners for tips and strategies that will help you invest in the stock market.
 

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