Avoid News Based Rallying Stocks
September 17, 2010 | In: Investment
It doesn’t make sense to you if I ask you to avoid buying into the stocks that are rallying up? Well let me try and explain the concept of news based rallying in stocks and also why you should completely avoid such stocks.
Playing With Stocks
Each and everyday there are some positive news flows regarding some stock and then we see a huge rally on such stocks. There are several people looking up for only such kinds of stocks where positive news flows, so they can put a large sum of money to trade and book profits the same day or in a couple of days. Most of these guys are those who have a lot of money to risk and even if they make no profit or a bit of loss, it hardly matters to them.
Retail Investors Get Stuck
But the problem arises when retail investors like us who don’t have a lot of money to risk get into the stocks and make a loss. Today someone was telling that they had purchased EIH at 160 and now they are stuck with a 20+ rupees loss per share. EIH had a news driven rally recently and several people had bought the stock and sold it in a profit as well but there are also some people who bought the stock at it’s highs to make some quick money but unfortunately got stuck with a loss. Now that guy will have to hold the stock for a long time to get back the sum he invested or book a loss.
What exactly happens here is, we see the news and before we realise we should buy the stock, it has already rallied a lot. We buy the stock at a very high price hoping to make some quick money. But soon the traders’ targets will be achieved and they will start selling thus taking down the stock value. Now the stock comes down from our buy price and we hope the stock to go up again. However that does not happen and the stock further goes down thus making us face a big loss. The guys who wanted to make profit did it already and we retail investors got stuck in the stock with a loss. News based rallying stocks are not for investors, but only for very small term traders who like to play with stocks.
Is Gambling Worth it?
Basically the news driven rallies are nothing different than a gamble, and gambling isn’t always beneficial. Some people make fortunes by gambling and some lose everything. It is very risky and if one can get good appreciation with proper investment, then why gamble?
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