Timing
the market is a strategy to buy and sell investments at a preferred price. This
includes stocks, bonds, commodities, mutual funds, index funds and
real estate. Every financial market experiences fluctuations in their trading
range based on news factors such as financial reports, news reports that
directly impact the company or product, stock and bond payouts, supply and
demand, and the economic health of the industry and nation.
By
studying these indicators and the cycles of your particular vehicle of
investment, you can predict the market direction. This will enable higher
returns as you buy and sell at premium prices. The goal in timing the market is
to buy as the price bottoms out and begins to gain momentum and to sell just
before the price peaks. Several market strategies are available to help predict
where your investment instrument is in the cycle.
The Price/Earnings ratio (P/E), the
dividend yield, the price-to-book ratio, the prime rate and the federal
funds rate are a few examples of ways to monitor investments for timing the
market. Many brokers and investment strategists monitor the up and down cycles
and the existing conditions at the time in order to predict market trends. It
is important to remember that buying on news is not a good market strategy
because by the time news is announced regarding a particular investment
instrument, the market has already factored it into the price.
When purchasing mutual funds or index
funds, you are buying a composite of securities and the price will not be as
volatile. It is helpful to investigate the trading curve for the last few
years. This will show you the pattern of the curve so that you can predict when
the best time to buy and sell.
The real estate market moves in longer,
slower cycles, which suggests staying power is your best strategy for timing
the market. For securities, many order types are available in timing the
market. Each is unique, depending on your goals and preferences:
- “fill-or-kill
order” – instructs a broker to sell an investment at the specified price
or better. If the transaction is not immediate, the order is cancelled
automatically.
- “limit order” - specifies a
buy or sell at a specific price or better.
- “market
order” - will negotiate a transaction at the current market price.
- “market-if-touched
order” - is similar to a stop order in that it becomes a market order if a
specified price is reached. However, a buy market-if-touched order is
entered at a price below the current price, while a sell market-if-touched
order is entered at a price above it.
- “not-held order” - allows floor
brokers to take more time to buy or sell an instrument, if they think they
can get a better price by waiting.
- “one-cancels-the-other
order” - two orders in one, generally for the same security or commodity. This order
instructs the floor brokers to fill whichever order they can first and
then cancel the other order.
- “specific-time order” - couples many
of the other order types with instructions that the order must be carried
out at or by a certain time.
- “stop
order” - tells a floor broker to buy or sell
an investment once a specific price is reached. These are often called
“stop-loss” orders because they are frequently used to protect profits or
limit losses.
- “stop-limit
order” - turns into a limit order when an investment trades at the price
specified in the order. Unlike stop orders, they demand that the trades be
made only at a specified price.
- “short”
- is to sell stock before buying it in the hope that the price will
decline, allowing the investor to purchase the shares at a lower price.
Timing the market can be more certain when predicated
on these safeguards. In all legs of investing, buying low and selling high is
the purpose, strategy and goal of timing the market properly.