Different Ways of Buying Stocks

Let's say you are interested in this one company. You read its annual report, like what you see and your calculation indicates that the stock is trading way below its fair value. You are excited. It is time to buy! Hang on for a second. There are several techniques of buying stocks out there. Some are better than the other. Let me explore several useful ones.

Buy all at limit price. Assume that we have done our research and we want to invest $ 2000 to buy stock XYZ at $ 12/share. We can do this by setting a limit order of $ 12/share to buy 166 shares of XYZ. The advantage for this method is that we will not pay more than $ 12 for our XYZ share. If you use market order, instead of limit order, XYZ might run up to $ 13/share and execute your order at $ 12.50. Fifty cents may not sound a lot, but in this case, you just saves $ 83 for using limit order. Any better methods? Check out this next one.

Buying half at $12. Buying half when it drops. Stock market is volatile. It goes up and down due to various reasons. In this case, we set a limit order to buy $ 1000 worth of XYZ at $ 12/share. When XYZ drops lower, and if you think that the reason that you initially bought it is still valid, then you can buy more XYZ at a lower price. If XYZ drops by $ 1, you already save $ 83 off the bag. What else is there?

Dollar Cost Averaging (DCA). With DCA, investors normally buy a specified dollar of stock at regular intervals. In this case, you can decide to invest $ 500 monthly in XYZ stock. If the XYZ stock falls, you can buy more shares next month. If XYZ stock rises, you would buy less. But it is ok. You already made money on XYZ stocks that you bought at a lower price.

Which method is the best? There is no clear cut answer on this. Personally, I will never use market order when buying a stock. Commission for buying a limit order is not as expensive as it used to be. My favorite methods is by buying half position initially and then add half more when the share price drops. If you have done your research and you feel that $ 12 per share is a good buy, then why won't you buy some more if it goes down to $ 10? Just make sure that the fundamental remains the same when the stock drops.

While knowing how to initiate your position is important, I am more inclined in focusing on how to calculate fair value of a stock. This is where the bulk of your investment return comes from.

Curious about fair value calculation? At http://www.noviceinvesting.com, these analysis are shown for free. No String Attached. No fee to be paid. You just need to put some time and effort into it. Honest.

Hari wrote regular commentary about stock investing. He is always on the lookout for stocks that match his buying criteria. You can share your ideas or questions in our discussion board. He would be more than willing to assist.

In The News:

Best Mutual Funds: Seeking Top Tiny Stocks  Investor's Business Daily
What is a mutual fund?  Economic Times

Kick The Tires

Before you buy another car you walk around the lot,... Read More

Which Way The Market

I am hearing predictions by brokers, financial planners, talk show... Read More

Shadow Bull

As one of my regular readers you know I have... Read More

Choosing An Investment Stock Broker

If you want one.And I don't recommend any broker with... Read More

How to Pick Winning Stocks

There is nothing more exciting than finding an undervalued stock... Read More

10 Tips For Creating Wealth From the Stock Market

1. Do not spread your money too thin.My friend has... Read More

Discover the Biggest Trading & Investing Online Mistake

Any online investor / trader seeks an excellent off or... Read More

Commoditizing the world

Let's discuss commodities; with the latest Enron situation, it is... Read More

Living Trust Investing: Income Considerations when the Grantor Dies

A common problem I often see when working with living... Read More

Are You A Stockaholic?

Today's society gives special recognition to alcoholics, sexaholics, binge-aholics, shopaholics,... Read More

Whitewater Stock Market

Ever done any whitewater rafting or canoeing? Long periods of... Read More

Maximizing a Stock Market Investment

Maximizing a stock market investmentThere are several factors an investor... Read More

Value Investing: Selecting From The Bargain Bin

Picking a beaten-down stock requires a different kind of selection... Read More

Dont Ask Your Broker

Unfortunately, most of you who are reading my column are... Read More

Trading Tips No 8: Picking the Best Stock Market Price

Carefully thinking through your goal as a trader is of... Read More

Perfect Storm

Having lived aboard a sailboat for 2 years I was... Read More

What is Involved in Peak Performance Trading?

There is so much involved in developing peak performance, that... Read More

Stops Make Money

During the day I watch CNBC-TV, the stock market channel.... Read More

Stock Analysis

I receive emails from Morningstar. This company provides statistics and... Read More

The Stock Market Doesnt Care if You are a Beginner?. Get Prepared to Succeed at Trading

Stock trading remains a very competitive field and the stock... Read More

Moving Averages

Every day on CNBC-TV they show a 200-day moving average... Read More

Defining a Long-Term Investment in the Stock Market

For some "long term" would mean holding a stock position... Read More

Successful Trading ? Taking Profits - Part 1

So you're started trading, you bought some positions with your... Read More

Downdraft

For the year 2000 we have seen hundreds of mutual... Read More

Prospering with Mutual Funds: How Anyone can ?Afford? an Investment Advisor

Recently I was invited to appear on a live CNNfn... Read More