The difference between the buy and sell transactions is profit.

I. BUY LOW, SELL HIGH

The idea of "buy low, sell high" is as old as trading ownership of properties. It is the basis of all business. Buy a property at one price and sell it at a higher price. The difference between the buy and sell transactions is profit. To make a profit is the reason to buy and sell stock.

When the investor first heard about the takeover, it was already late in the game to make a play. Thinking for a day or two about buying or selling can sometimes be disastrous. The investor sold out the position without learning the details.

Once a strategy is put in play, an investor should not be so quick to change. The investor should have checked the background on the two companies. The 10 percent loss strategy is just that, a 10 percent loss. It has nothing to do with how a price will perform in the next few days. Some professional investors look for stocks that are down 10 to 15 percent and consider them buying opportunities. They know the 10 percent will be bailing out and the stock prices can become even better bargains. These investors will allow a 10, 15 or even 20 percent drop because the majority of buyers did not buy at the top.

If an investor is going to speculate on takeovers, it is important that he or she realize that the prices will tend to be volatile until the actual takeover occurs.

The axiom "buy low, sell high" should not be followed in reverse by the investor.


II. BUY HIGH, SELL HIGHER

Many individuals are attempting to "buy high and sell higher" when they buy a stock that is on the move. In fact, professional traders frequently use the strategy. Soaring prices are attractive to investors, who believe the prices will keep moving. As long as the momentum of the price swing attracts new buyers, the soaring stock price will continue to climb. It might run up for a couple of days, weeks or even months. Eventually, however, there is a hesitation, followed by a turn as the profit taking begins. The last buyers not only have the smallest gains from the run up, they will obviously also have the biggest losses. It is somewhat like a pyramid scheme where the losers are the last to join.

A severe market decline creates lower prices and large cash positions even though the earnings of stocks can remain unchanged. The bargains can be resisted for only a limited time. In a severe market decline, the climb back to former levels could take a few months or longer, but the recovery will come in time.

Where are the plays?

Individual investors can seek out stocks that are either in play by the institutions or are likely to come into play. Often they are stocks with strong fundamentals in earnings and revenues, found in industries with good growth potential. Medical products and devices can be exciting fast growth companies. Sometimes older products companies with strong growth records do well.

Enhancements

The strategy of buy high, sell higher can be enhanced by anticipated increases in earnings or by corporate takeover situations. Although anticipation of higher earnings creates unusually high ratios, when the earnings do increase, the ratios return to normal levels. If the earnings do not cause a return to normal levels, sellers will eventually force the return.

Takeovers

Corporate takeovers create a different situation. Professional arbitrageurs go on search missions in which they look specifically for companies likely to be bought out by some other company. The large leveraged buyout takeover can become a classic buy high, sell higher situation. For those companies who could arrange the deals, there was less risk with greater profits.

Long-term intention

Buying high and selling higher can be a visible way to make money in the stock market, but it is not without risk. The strategy usually calls for the intention of a longer term hold for example, when the earnings cannot catch up with the price or in a takeover, when the deal is finalized. Although it is possible to trade in and out during volatile times, the whip-saw effects of being on the wrong side can be devastating.

Corporate takeovers that fail to materialize are a different story. If a buyout does not occur, the stock price will probably fall to previous levels or below. Most often, investors would be prudent to sell and take the loss quickly, rather than hang on and hope for a recovery. A prudent play after selling out can be to attempt bottom fishing once the price gets hammered. Such activity should be based on the individual's belief that the stock can weather the storm and that the company is still capable of generating good earnings.

It would not be unusual for institutional or other experienced stock traders to play these stocks for small profits. They might sell short at the peaks and attempt to buy long at the lows. Such actions often end up to be momentum oriented. They watch the trades minute by minute to see if there is any strength as shown by volume. If strength is indicated by larger volume, they hold their position. If the volume declines, they close out their positions and plan their next strategy. Obviously, timing is everything in these speculative strategies.

Long or short term

Buy high, sell higher can work for either the conservative long-term or speculative short-term, strategy. But what either strategy needs is a stock that has a solid reason to go higher in price. Two of the main reasons for a stock price to go higher are anticipated higher earnings or a takeover plan.


III. SELL HIGH, BUY LOW

Sell short at a high price and buy back at a lower price. Wonderful, an investor can make money in a falling market.

Limited gain

A short position can profit only to the amount that a price drops. But in a short position, there is virtually unlimited risk because there is no limit to how high a stock price can go. Eventually, the shares must be bought back or if the investor currently owns the shares, delivered to cover the short position. The potential problem is that if the price does not fall, it might rise higher than the investor can afford to pay.


IV. SELL THE LOSERS AND LET THE WINNERS RUN

It is one of the most important understandings an investor can have about the stock market. It is prudent for an investor to sell stocks that are losing money, stocks that could continue to drop in price and value. It makes equally good sense to stay with stocks that show significant gains, as long as they remain fundamentally strong.

Any price drop is a losing situation. Price drops cost the investor money. They are a loss of profits. In some circumstances the investor should sell, but in other situations the investor should take a closer look before reaching a sell decision.

The determination of whether a stock is still a winner depends on the cause of the price correction. If a price drop occurs because of a weakness in the overall market situation or is the result of a normal daily fluctuation of the stock price, the stock can still be a winner.

If, however, the cause of the drop has long term implications, it could be time to take the loss and move on to another stock. Long term implications could be any of the following:

1 Declining sales

2 Tax difficulties

3 Legal problems

4 An emerging bear market

5 Higher interest rates

6 Negative impacts on future earnings

Any event that has a negative impact on the long term picture of earnings or earnings growth can quickly turn a stock into a loser. Many long and short term investors will sell out their positions and move on to a potential winner.


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