Long-term investors are generally not concerned with short-term trading principles. We are not concerned with short-term price swings or what the Stochastic Oscillator is telling us as we are investing with at least a 10 year timeframe in mind. However, I am going to suggest that there are some common trading principles that long-term buy-and-hold’ers should consider using when placing their trades. They can help avoid mistakes and overpaying for a stock due to regular market action. In the end, they may not mean too much to your portfolio performance, however every point can count and why not give yourself a little bit of extra help to secure a better return.
Use a Limit Order When Entering Your Buy Order
In a limit order, the investor enters a specific price limit that they will buy the stock for. The alternative is the market order, where an investor enters the trade and lets the market determine what price they will pay for the stock. Limit orders are beneficial because you will get the shares at the price you want (hopefully). In markets with very high volatility, then limit orders can help you to not overpay for the stock because the market is acting crazy. Most brokers nowadays do not charge more for a limit order.
Pay the Lowest Commissions Possible
For short-term traders, commissions are crucial simply because the volume of trades can add up and with it the costs to trade. If you are a long-term investor costs are just as important. Every extra dollar you pay in commissions to your broker is money that will not got to work for you. Think of it like lost money, never to be found again.
Always Get A Stock Quote Before Sending the Order
Prior to entering your order into your online broker’s system, ensure you get a quick stock quote before entering that order. This is especially important in volatile days like we have seen in the past few weeks. Stock prices can swing quite dramatically and you don’t want to pay more than you need to. Also, running a quote will verify the ticker you are using is the correct one!
Review Your Trade
Along the same lines as the principle above, always review the trade you entered to ensure it is exactly what you want to do. If you entered a limit order make sure the limit price is what you meant to enter. If you did something other than an all-or-none order, make sure it is reflected properly. This is just one final check before sending the order.
Review Order Confirmations to Make Sure You Were Charged Correctly
Once your trade is entered and filled you will receive some form of trade confirmation. Review this confirmation to make sure it was filled as per your requests. Check that the company bought is correct, the number of shares bought is right, and that the commissions you have been charged are exactly what they should be. If anything is wrong, call your broker immediately to get it fixed.
Keep Detailed Records of Your Trades
Most investors, long or short-term keep trading records whether is be through something like Microsoft Money or an Excel spreadsheet. This is crucial for the short-term trader to keep a record of what was done and to review performance. It is just as important for long-term investors. You can learn a lot by reviewing your portfolio and looking where mistakes were made.
I am sure there are a lot of other tips that people can give out there. Perhaps you use charts to help with your long-term investing? Let me know by using the comments section below.
(Photo Credit: Neil Gould)