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Use these two words when you buy shares or you WILL lose money!

by , 23 February 2016

“Francois, what happened to share X today? It dropped 10% instantly!”

“Francois, what happened to share Y today? It soared 10% instantly!”

If you've been following the JSE over the last few years, you would've seen certain shares drop and jump by over 10% - more than once - in a single day.

So what is going on?

And what should you do if you'd rather be on the profit side of the price swing?

Well, it's as simple as using two words when you buy a share…

ALWAYS use these two words when you tell your broker to buy a share “Limit Order.”
What does this mean?
Well it means you tell your broker to only buy the shares under a certain price. Remember, every month I give you a buy up to range for shares.
So, if I recommend you buy XYZ share below 120c, what you should do is tell your broker to “place a limit order to buy share XYZ at 120c”. This would ensure that the only way you buy shares in XYZ is if you can get them at or below 120c.
But what do most investors do?
Well they tell their broker “Buy me some shares in XYZ”.
When you give an instruction like that, your broker will merely place a ‘market order’ for your shares. So what’s wrong with that, you ask?
Well a ‘market order’ will simply make sure you buy shares in XYZ at ANY cost.
While, you can get away with making a ‘market order’ with large blue chip shares; it is a mortal sin to do so when you invest in penny shares!

I’ll explain why by using the Santova example from above…
Avoid this mortal sin and dodge big losses (2014 Case Study)
On 28 February 2014 Santova hit a high of 180c early in the morning… The day saw a lot of shares trade in the company, nearly double the average amount of shares that traded per day in the last three months.

But then the share instantly dropped to 165c. Down 15c in a matter of minutes…
What happened?
Well, with all the shares that was sold that day it happened that suddenly there were no buyers left…
If you were looking at a stock information screen the orders for the share would’ve looked something like this:
As you can see from this there simply wasn’t anyone wanting to buy these shares at that specific moment…
Then what happened?
Well, there was an investor that wanted to sell their shares… This investor didn’t use a limit order but rather said “Sell my shares at whatever price the market will give me”…
What happened next was an opportunistic investor that told their broker “Buy me some Santova shares at 165c”.
Being the ONLY buyer for the shares in the market this investor would’ve seen his order filled – at 165c. And the seller would’ve been shocked, asking his broker “with Santova selling at 180c how is it possible that I only got paid 165c per share?”
Well, as you see, the answer to this is easy…
The seller committed the mortal sin of not instructing his broker to sell the shares with a “limit order”. So he had to be happy with getting “any” price for the shares!
And the thing to remember here is that this big drop in share price didn’t tell you as investor ANYTHING good or bad about the company. ALL it showed you was how investors get caught out making bad buy or sell decisions with a share that doesn’t have high liquidity… Because the following day the share traded back at 176c again with big volumes and no problems!
Just like selling at all costs can hurt you, buying at all costs can too!
Just like you could get a horrible price if you sell your shares using a market order you could also end up with a raw deal if you buy shares with a market order.
You see, if you place an order to buy a share at the market price you won’t know what price you’ll get beforehand.
Because, just as quickly as a share drops 15c it rises 15c. And, if you placed an order to buy at market price just as this happens you can quickly end up overpaying for the share…
If you place a limit order though the only way the share will be bought for you is if your price is matched or you get a better price!
So in the future, STICK to your buy ranges and insist on a “LIMIT ORDER” when you buy a share and don’t get stumped when you sell one using the market price ever again!

Use these two words when you buy shares or you WILL lose money!
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