Investment Tips – Patience is the Most Powerful Ally
This is the second in the series of investing tips that I’ll be discussing. The latest copy of Forbes magazine has a list of 365 tips on investing to get rich. I thought I’d go through some of the interesting ones and comment on them. This next investment comes from Benjamin Graham (teacher of Warren Buffet): “patience is the fund investor’s single most powerful ally.”
Investment Tips – Patience is the Fund Investor’s Single Most Powerful Ally - Selecting a Stock Is the Easy Part
So, you’ve selected a stock or market index fund that you’d like to invest in? Great! Sometimes that’s the easiest part. Now, what price should you pay for it? Hmm… therein lies the difficulty! The price of just about any actively traded stock changes throughout the day. Many times, the price changes by the millisecond. Determining what price level a stock represents a good deal is 80% of what you’ll probably struggle with.
Investment Tips – Patience is the Fund Investor’s Single Most Powerful Ally - Market Order
If you’re like many amateur investors, once you decide on a stock, you’ll buy it right away with little to no thought for the price you’ll pay. This is called placing a market order. A market order to buy a stock guarentees execution at any price. This means that if you put in a market order to buy 100 shares of Priceline (PCLN), you’ll buy it right away, but the price of the shares you purchase could fluctuate, it’s usually around the current market price, but this isn’t guarenteed with low liquidity stocks (stocks with very low trading volume). So, what if you have a price in mind that is the maximum you’ll pay, and you have a little patience?
Investment Tips – Patience is the Fund Investor’s Single Most Powerful Ally - Limit Order
If you’re a savy investor and you have some patience, you’ll go for the limit order. A limit order guarantees price, but not necessarily execution. What the heck does that mean Derek? I know, I know – it was very confusing to me at first, too. OK, a limit order is an order to buy a set number of stock shares at a specific maximum price. Say Priceline (PCLN) is currently trading at $1,181 a share. Now, say I want to buy it, but I’ve decided that the most I’d like to pay for it is $1,100. If I put in a limit order to buy 100 shares (I don’t really have this kind of money, trust me ) at $1,100, I may only get these shares if the price dips that low at some point. If not, the order will either go unfilled (I didn’t get the shares) or will remain in force (still sitting there waiting to buy my shares). So you see, if you’re patient, you have the potential to get a better deal with a limit order even if you’re away from your computer when the price drops.
However, if the price never dips to $1,100, but instead keeps climbing, I’ll miss out on the Priceline party :-) So, a limit order does have a down side in that you’re not guaranteed to purchase the stock shares. OK, so is there a way to put an order in and have it sit there for weeks in case the stock price ever drops and “goes on sale” when you’re not at your computer? “Why yes, yes there is – I’m glad you asked!”
Investment Tips – Patience is the Fund Investor’s Single Most Powerful Ally - Day Orders vs. Good Till Canceled
When you create an order to buy a stock, it will almost alway default to a day order. This means that if your order isn’t filled (you purchased the stock), then it will automatically cancel itself at the end of the day (4:00pm EST). Now, if you want your order to stick around for weeks at a time incase the price of a stock drops and you’re not sitting at your computer to scoop up the shares at a discount price, you’ll need a Good Till Canceled Order. A Good Till Canceled (GTC) order will sit there in force until you go in and cancel it manually. This means that if you place a limit order to buy 100 shares of PCLN at $1,100 GTC, the order can sit there for weeks at a time until it is finally executed or you cancel it.
As you can see, GTC stock purchase orders really only make sense for limit orders. A market order is almost always executed immediately because there is someone out there willing to sell their stock to you at some price
Investment Tips – Patience is the Fund Investor’s Single Most Powerful Ally - Can I Use a Limit Order to Sell My Stock?
Of course you can! When you decide it’s time to sell, the same exact idea applies. If you sell as a market order, you’ll dump it right away at the market price. As long as there’s someone out there to buy it at the current market price, this is generally how much you’ll get for it. If no one wants to buy, then the price will drop until your stock is matched up with a buyer at a lower price. This needs to be taken into account if you’re selling a thinly (low volume) traded stock or you have a ton of stock to offload.
If you’re more patient, then you can set a limit sell order at a particular price. Your stock shares will only sell if the price goes high enough and “gets hit.” This means that there was a happy buyer out there somewhere to take the shares from you at the higher price. If your limit order sell price never gets hit, then you’ll still own the shares until it does.
The same day order and good till cancel order rules apply here too. Say you bought 10 Apple shares at $700 (I’m sorry ) and you decide that if it ever gets back up to $700 you just want to sell them and be done with the trade. OK, no problem – simply enter a GTC Limit order to sell 10 shares at $700, and you’re good to go. If the price of AAPL stock ever gets that high again, your shares will sell when you’re matched up with a buyer that will pay $700.
Investment Tips – Patience is the Fund Investor’s Single Most Powerful Ally - Final Thoughts
This article covered the basics of market orders and limit orders. It also covered the difference between a day order and a good till cancelled order. The patient among us will favor limit orders and good till canceled orders. The advice given by Benjamin Graham is very wise here. I highly recommend taking a patient approach and use good till canceled and limit orders for all your stock investing needs.