Have you guys ever experienced this situation where once you bought a stock, their share price immediately drops and caused you to suffer paper losses? However, different people will react differently towards this kind of situation, some will be excited and some will be disappointed, so which one are you?
Let me crack the code on why some people are genuinely happy and excited when the stock they bought immediately dropped in price. This is because everyone is unsure about their first purchasing on a stock, as you are not sure that whether this price is to lowest, or will it drops further down. Hence, they are able to buy more and lowering their average cost at the same time. Furthermore, most of the people are cautious about their first purchase, hence the quantities will be lesser, and dropping down more meaning that they have another opportunity to build up their portfolio.
However, there will also be another concern if the stock price dropped. What if the share price dropped continuously, and we as a small investor will not be able to keep averaging down? First, we shall know that a good company and a good stock will not have their share price to drop 30% in a day, or dropped 80% from its peak point, unless they are extremely overvalued such as the Technology Bubble in 2000. That being said, the solution for this is to set a few price point to enter and never buy the stock if the share price failed to drop to your entry point. For example, if you bought a stock at RM1.00, you are not going to buy more at RM0.97 unless you are fairly sure that the stock will only hit RM0.97 and rebound back, but do take note that there is no certainty in stock market. Hence, the strategy you can use is to put entry points at RM0.90 and RM0.85, and when the share price dropped to these points, you know that this is the chance to buy more at lower price.
On the other hand, the writer is well aware that some people will be disappointed when the share price dropped after they purchased the stock. To be honest, unless you are doing short-term trading on a relatively weaker company that every bid that the stock dropped will make you anxious, or else it should not be too big of a problem. A good company will definitely rebound in no time, and we can see this happened back in March 2020 where all companies dropped to their recent low, but is able to rebound back in the next few weeks.
In short, a price drop shall not be a problem from an investing perspective, but should be viewed as a golden opportunity to buy more. However, this will be all up on the person’s attitude and holding power, to see whether he or she can handle the temporary paper loss, for a potentially few-fold of returns.
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