If you are buying stocks with the help of a broker, you might be able to do a better job on your own. I have talked with several people who lost nearly half of their portfolio’s value during the last bear market. That was with the help of their broker. Personally, I think that most of us are more than qualified to do that on our own. The whole idea of hiring a broker in the first place is to help us to determine which stocks to buy, when to buy them and when to sell.
The problem with most brokers is that they sometimes only tell you to buy and hold stocks. This pretty much guarantees that at some point any gains you might have in the stock will be lost. Here’s why. A stock’s price is determined by the supply of that stock in the market and the demand for it. Most investors are under the assumption that all of us small investors are the ones that affect a stock’s price. In fact, though, our purchases have very little impact on the demand. What does affect the price of a stock in a big way is when large institutional investors start buying a stock. They buy in such huge volume that it forces the price of a stock up much like a wave in the ocean. Things go great as long as they are in the wave. However, one day the “big money” from institutions will leave the stock and guess what? They sell in such huge volumes that the price starts to go down once they start to exit their position in the stock. This is similar to the wave hitting the shore.
Because “big money” rides through stocks like a tsunami in the ocean, you want to be out of the stock before the devastation hits. Because once the stock’s price starts it’s decline only one thing is going to make it go up again. That’s another ride on the backs of large institutions buying the stock. Often that institutional support never comes back and this leaves you with a stock that loses all the gains you realized on paper.
Ideally, this is where the services of a broker would come in handy. They would tell you when to sell a stock. However, in most cases, that day never comes. The key then is identifying when to lock in your gains and buying a different stock to ride the wave again. This is something you can learn by watching two key pieces of data. The price and volume action of a stock tells you whether it’s being bought or sold by institutions. Here’s how.
First, if the stock closes in price on higher volume, it’s a good indication there are more buyers than sellers. There’s more demand. When there is more demand, this is a sign that large institutions may be buying that stock.
Second, if the stock closes lower in price on higher volume, this is a sign that there are more sellers than buyers. There’s more supply. When there’s more supply, this can be a sign that giant institutions may be selling.