Saturday, 22 December 2012

Good quality company but trading at high price - Add this to your "watch list."

If the price is too high, you should add the company to your "watch list."  You have found the company to be a good quality company but the price is too high.  If it's much too high, put it on your "watch list" and wait for it to come down.

In rare circumstances, you may wish to put in a market order; but you will not want to do this in every case.

The "buy price" is the price at which both your risk and reward criteria are met.  This is the highest price you can pay and realize both a Total Return that will double your money every five years and where the risk of loss is less than one third of the potential gain.

The reward should be at least three times the risk.  Even though you may sometimes accept a total return of less than 15% because of the contribution that the stock can make to your portfolio's stability, you don't want to accept a Risk index of much above 25%.

If the Risk index is zero or negative, you should question your assumptions about the quality issues.  You will want to question why the price of the stock is so low.  What do others know about the company that you don't know?  If you're a new investor, you should move on to another candidate.  If you can satisfy yourself that the price is depressed for no good reason, then you can be a contrarian and buy the stock.

Additional note:

Definition of 'Market Order'

An order that an investor makes through a broker or brokerage service to buy or sell an investment immediately at the best available current price. A market order is the default option and is likely to be executed because it does not contain restrictions on the buy/sell price or the timeframe in which the order can be executed.

A market order is also sometimes referred to as an "unrestricted order."

Investopedia explains 'Market Order'

A market order guarantees execution, and it often has low commissions due to the minimal work brokers need to do. Be wary of using market orders on stocks with a low average daily volume: in such market conditions the ask price can be a lot higher than the current market price (resulting in a large spread). In other words, you may end up paying a whole lot more than you originally anticipated! It is much safer to use a market order on high-volume stocks.

Read more:

Calculating the Risk Index

Risk Index
= (Current Price - Potential Low Price) / (Potential High Price - Potential Low Price)

The result is the risk index, the percentage of the deal that is risk.
We look for a risk index of 25 percent or less, meaning that only a quarter of the proposition or less is risk.
We would then have at least 75 percent to gain versus at most 25 percent to lose; so the reward is at least three times the risk.

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