I'm Trying to Understand Why Some People Buy Appreciated Stocks
There are many different techniques in stocks. The one that's most commonly known is to buy low and sell high. However, some people are willing to buy appreciated stocks (or appreciated cash investments involving stocks such as the Unit Investment Trust Fund or UITF) for a reason. It just baffles me. I decided to read through Forbes and found out these reasons which could be why I think some foolish people might give me my benefits:
Why Others Buy Stock When You Sell
Each of us has different investing goals and investment plans. You may be saving for retirement while someone else is day trading stocks. Or you’re an institutional investor managing a billion-dollar pension. Different goals mean different motivations and actions.If you are selling, why might someone else be buying?They Have Regularly Scheduled Investments
There are investors who have regularly scheduled investments, such as a retirement account contribution each paycheck. This approach is an investment strategy known as dollar cost averaging.Every month, these investors will buy shares at the market price without a specific reason other than it’s payday. I do this every month when I contribute to my retirement accounts – I buy shares of an index fund regardless of what I feel about the future of the market. I buy based on the day of the month and nothing else.They are Buying the Dip
There are a lot of reasons why a stock price might drop, such as a surprising earnings miss or a broad market correction, but some investors believe in a strategy known as “buying the dip.” If you feel that the market over corrected, you might want to be buying shares.Investors with a long-term investing horizon might invest extra cash when shares drop 10%. “Buying the dip” is like buying extra groceries during a buy one get one free sale.They Have Limit Buy Orders
One of my favorite investing websites, Crossing Wall Street by Eddy Elfenbien, maintains an annual Buy List of companies with an updated “Buy Below” prices. He adjusts those prices but believes that a company is worth accumulating if their prices fall below this “Buy Below” price.Investors who follow this practice may set long term good-til-canceled limit buy orders that trigger when there are big dips. They set these because they know they want the stock at that price but don’t want to check prices all the time. If there’s a sudden drop, they are willing buyers.They Are Covering Short Sales
If you were selling your shares after a drop in price, you might be selling it to someone who believed a drop was coming.They are known as short sellers. If you think a stock’s price is going to fall, how would you take advantage of it? One strategy is to borrow shares of stock from someone else, sell them on the market today, and then buy them back when the price has fallen.If the stock price does sell, and you go to sell your shares, the buyer may only be buying them to return the shares they borrowed. They may not believe the company is worth owning at all!They Are Swing Traders
Many long-term investors use fundamental analysis like analyzing balance sheets and earnings call transcripts to buy or sell positions. You might be selling because you think the future of the company looks bleak.Other investors believe that they can use technical analysis to identify opportunities. They use these technical indicators to day trade stocks based on relatively small movements in the price. One common indicator is the idea that a stock can be “oversold” or “overbought” and based on the Relative Strength Index.In some cases, investors trade the headlines in hopes of making a quick profit. One example is when a CEO unexpectedly dies or resigns. Another example is when an analyst lowers their rating for a company from “buy” to either “hold” or “sell.”They aren’t buying because they believe in the company, they are buying because they are trying to take advantage of short-term volatility.They Are Rebalancing
There many times during the day, weeks, and month when you will experience atypical market behavior because various groups are required to perform certain actions. These times are often very unpredictable because of quirks in the schedule.For example, one of the most volatile times to buy or sell stock is during the first and last 15 minutes of a trading session. These windows are the time when many institutional fund managers—including index funds—rebalance their portfolios.An individual buyer may be personally rebalancing their portfolios. This is often done by selling assets that have seen gains and buying those that have lost value.It’s a Witching!
Have you heard of a “witching” on Wall Street?Stock options, a contract that confers the right to buy or sell stocks at a certain price, expire on Fridays. You have stock options, stock futures, stock index options, and stock index futures. A triple witching is when three of them expire on the same Friday. A quadruple witching, which only happens four times a year, is when all four expire on the same Friday.During these days, there will typically be much higher trading volume as profitable contracts are executed. Someone might be buying your shares not because they love the company but because they are involved in exercising an option.Maybe They Are a Greater Fool!
Another reason there is almost always someone willing to buy is the “greater fool theory.” This theory states that someone is willing to buy an already expensive asset thinking it the price will go higher and they can sell for a profit.Every few years, we hear about how a financial bubble is bursting for a particular asset class. Before the bubble bursts, there is a sharp increase in asset prices. Some of those last investors are buying because they experience “FOMO”—the fear of missing out.Technology stocks were the bubble in the 2000 “Dot-com bubble.” Some companies like Microsoft MSFT +2% and Apple AAPL +1.6% have more than recovered from this crash. But many companies went out of business or have yet to regain their all-time highs from 20 years ago.
I looked a the reasons and it seems that goals will depend. I was thinking about it that these could be the best reasons why some people choose to buy appreciated stocks over depreciated ones:
- Regularly scheduled investments are one. In the Philippines, it's called peso cost averaging. I want to call it money cost averaging for the benefit of those who don't use dollars and pesos. It could be that a person allocates the same amount of money per month in stocks. The AXA Chinese Tycoon Fund has people allocate at least PHP 3,000.02 per month and nothing more nothing less even if the stock market is at an all-time low.
- The other would be the Greater Fool which buys the stocks at a higher price thinking it will go higher. Buy high and sell higher can be done properly but I prefer to avoid it. Though, they might be the wise investor's "best friend" because somebody will buy their appreciated stocks or managed funds that involve stocks.
It could really work this way. I would buy a couple of depreciated stocks from Jollibee. After a few months, the prices will rise. I decide to sell some of my shares. What happens next is that there could be two kinds of buyers--one who has a regularly scheduled investment and the other who is the Greater Fool. One buyer invests the same amount in stocks and will use the same amount even if he or she will get lesser units. It's like the person uses PHP 1,000.00 in stock every month for long-term investments. Meanwhile, the other traders maybe buy the appreciated stocks hoping that they'll rise higher. It does sometimes work that way that some people will decide to buy as soon as it rises because it may rise higher. Though, I think buying high to sell higher needs to be studied carefully and it's something I'd avoid.
Right now, I want to give a hang on stock trading. Though, it requires careful planning. Getting a diversified portfolio would be the best. Knowing the blue-chip stocks would be the best. I think value-cost averaging might be better though. In short, invest more when the market is low and less when the market is high. It might be good to invest PHP 2,500.00 when the market is high (since you get lesser units) and PHP 5,000.00 when the market is low (since you get more units). It might be good to sell some stocks if the market is unusually high. If these stocks give no dividends then it might be time to sell them, save that money, and then wait for another opportunity for the stock market to go down and start re-investing. After all, buying stocks when it's high is a move some may want to avoid unless they're people who have other motives for buying highly-valued stocks such as dividends and the like.
References
"Where Can I Invest My P1,000? 8 Investments to Consider (Plus Pros and Cons)" (Updated: January 17, 2022)
"Why Do People Buy Stocks When You Sell?" by Jim Wang (December 17, 2020)
