"Buy low, sell high" is possibly the most famous adage about making money in the stock market. It's so obvious it sounds like a joke. In reality, it's a lot easier said than done.
Key Takeaways
- Buy low, sell high is a strategy where you buy stocks or securities at a low price and sell them at a higher price.
- This strategy can be difficult as prices reflect emotions and psychology and are difficult to predict.
- Traders, thus, use other tactics, such as moving averages, the business cycle, and consumer sentiment to help decide on when to buy and sell.
What Is Buy Low, Sell High?
Behind the truism is the tendency of the markets to overshoot on both the downside and the upside. Part of the reason is a pure herd instinct that drives stock prices. The investor who takes an unbiased look at the market might be able to see the herd instinct at work and take advantage of the extreme ups and downs that it causes. That investor can buy low and sell high.
Unfortunately, it's easy to determine after the fact whether a price was too low or too high and even why. During the moment,it is monumentally difficult. Prices both affect and reflect the psychology and emotions of market participants.
For this reason, "buy low, sell high" can be challenging to implement consistently. Traders trying for a more objective view consider other factors to make a more informed decision. These factors include moving averages, the business cycle, and consumer sentiment.
Moving Averages
Moving averages are derived solely from price history. They show price fluctuations over time, essentially smoothing out the short-lived price bumps to show the general direction of a stock over time.
Some traders track two moving averages, one of short duration and another with a longer duration, to protect downside risk. One common method is to use the 50-day and 200-day moving averages. When the 50-day moving average crosses above the 200-day moving average, it generates a buy signal. When it crosses the other way, it generates a sell signal. The point of the moving average is to help a trader time a buy or sell at the right point in the trend.
Business Cycle and Sentiment
Over the long term, the drivers of the market as a whole follow a consistent pattern, moving from fear to greed and back to fear. Times of maximum fear is the best time to buy stocks, while times of maximum greed are the best time to sell.
These extremes take place a couple of times every decade and have remarkable similarities. The emotional cycle follows the business cycle. When the economy is in a recession, fear predominates. This is the time to buy low. When the economy booms, prices go up like there's no tomorrow. This is the time to sell.
Long-term investors might consider watching the business cycle and consumer sentiment surveys as market timing tools. Regularly published reports such as the Consumer Confidence Survey provide further insight into the business cycle.
Additional Challenges
There are notorious examples of market extremes, including recent instances such as the internet bubble of the late 1990s and the market crash of 2008. Both proved to be excellent opportunities for those who bought low and sold high.
At the time, it seemed as if the trend would never end. Internet stocks surely would never go down in 1999. The housing industry certainly would never recover after 2008. In those moments, investors who sold internet stocks or bought housing stocks might well have felt they were being punished, as the trends kept going in the other direction—until, that is, they didn't.
A successful investor must ignore the trends and stick to an objective method of determining whether it's time to buy or time to sell. If you don't already have a trading account and would like to try your hand at the buy low and sell high strategy, feel free to check out Investopedia's list of the best online brokers to help you choose a broker and get started.
FAQs
Like many investing bromides, “buy low, sell high” is easier said than done. A huge body of research has shown that timing the market is all but impossible, at least consistently. If you were to “buy low” on assets and “sell high” repeatedly, you would indeed be an investing genius and quite rich.
What is buy low sell high strategy called? ›
The strategy of buying low and selling high in stock trading is commonly referred to as "momentum trading" or "trend trading." The idea is to identify stocks that are currently undervalued or experiencing an upward momentum and then sell them when their prices have risen.
What is the buy low sell high principle? ›
Buy low, sell high is an investment strategy that involves purchasing securities at a lower price and selling them later at a higher price. Timing the market and implementing this strategy can be challenging, as market movements are unpredictable.
How do you build wealth buy low and sell high consistently? ›
One of the most commonly quoted pieces of investment advice (or cliché) is you want to buy low and sell high. It's as simplistic, as it's unhelpful. Despite the obviousness of the advice, there's only one proven way to do this consistently: through a tactic called rebalancing.
How to know when to buy low and sell high? ›
There are factors to consider when employing the buy low, sell high strategy, including:
- Moving averages. Commonly used for technical analysis, moving averages refer to an asset's average price over an established period. ...
- Business cycle. ...
- Investor Bias. ...
- Stock pricing trends. ...
- Benefits:
- Drawbacks:
The idea is to buy the strongest stocks (as measured against the performance of the overall market), hold these stocks while capital gains accumulate, and sell them when their performance deteriorates to the point where they are among the weakest performers.
What is the word for buying low and selling high? ›
arbitrage Add to list Share. /ˌɑrbəˈtrɑʒ/ Other forms: arbitraging; arbitraged. "Buy low, sell high" is the mantra of the stock market. Perhaps the most extreme example of this is arbitrage, the act of buying and selling goods simultaneously in different markets to gain an immediate profit.
Who said buy low sell high? ›
By encouraging investors to go their own way and not be deterred by temporary headlines, Buffett is laying out his vision for buying low and selling high. If you know your stuff, go ahead and buy when others aren't, and don't be afraid to sell when others are buying.
Why is an investor's goal to buy low and sell high? ›
Part of the reason is a pure herd instinct that drives stock prices. The investor who takes an unbiased look at the market might be able to see the herd instinct at work and take advantage of the extreme ups and downs that it causes. That investor can buy low and sell high.
Is it better to buy and sell or buy and hold? ›
Key Takeaways
Buy and hold investors tend to outperform active management, on average, over longer time horizons and after fees, and they can typically defer capital gains taxes. Critics, however, argue that buy-and-hold investors may not sell at optimal times.
When values are lower, your contribution will purchase more shares. Over the course of a year, you'll pay an average price for the shares your purchased. Therefore, you've reduced the risk of repeatedly buying at peak values. With this approach, you can start investing early and take advantage of compound returns.
What is buying low and selling high making a large capital? ›
The correct answer is Option B: speculation. Explanation: Speculation: Speculation, often known as speculative trading, is the act of engaging in a financial transaction that carries a considerable risk of losing value but also carries the hope of a sizable gain or other significant value.
Is Buying low and selling High a good strategy? ›
"Buy low, sell high" is a fundamental investment strategy that can yield substantial profits if executed correctly. By conducting thorough research, analyzing market trends, staying updated on news, setting clear goals, diversifying your portfolio, and being patient, you can increase your chances of success.
What is the best strategy to get rich? ›
To become a millionaire, start saving early and invest your money to take advantage of the power of compounding interest. Savvy savers limit their spending so that they can put more money to work for them. Maximize your retirement contributions every year to earn tax-deferred or tax-free growth.
What builds your wealth faster? ›
Relying on multiple sources of income can significantly accelerate wealth accumulation. Pursuing side businesses, freelance work, or passive income streams such as rental properties and dividend-paying stocks can supplement primary income.
Is high or low price to sales good? ›
Investments with lower P/S ratios are generally more attractive as this indicates the company is generating more revenue for every dollar investors have put into the company.
Is selling at low prices always the best strategy for businesses? ›
A low pricing strategy often discourages some customers because when you offer the lowest prices consistently, consumers begin to doubt that you have low-quality products. That's why it is crucial to focus on competition-based pricing to stay competitive in the market.
Should I sell my stock when its high or low? ›
It depends. If a stock price plunges because of a significant and long-term change in the company's outlook, that's a good reason to sell. Virtually all stocks, even the bluest of the blue chips, experience temporary setbacks and then move back upwards. Averaging down in such cases is a strategy to consider.
Why is low price strategy good? ›
Many businesses choose an everyday low-price strategy to attract customer segments with a high price sensitivity. These customers prefer consistency, transparency, and frugality over other value drivers. Everyday low pricing can help retain such customers.
