Stocks that have gone up recently, especially those with a lot of news, often attract even more buyers. This obviously drives the price up even higher.
People get excited about what they read and see and want a part of the action. They jump into a stock that is already trading at a premium – they buy high.
Traders : Experienced traders can make money jumping in and out of a stock that’s caught the public’s attention, but it’s not a game for the inexperienced and it’s not investing. There’s risk involved and tax consequences along with other issues that mean most investors should leave this activity to short-term traders.
For most investors, trying to grab a piece of the latest flashy stock, usually means paying too much (buying high).
Bad Decision : The other side of the market is when a stock has fallen; most investors may want to sell along with the rest of the market. If you go by price alone, this can be a bad decision (sell low).
There are many reasons a stock’s price drops and some of them have nothing to do with the soundness of the investment. That’s why if you only follow price you may miss an opportunity. After a stock’s price has fallen can be a great time to buy (buy low) if you have done your research on the company.
Conclusion : If all you know about a stock is the price, you may (and likely will) make investing mistakes. Remember, if a stock has had a good run up it may be time to sell, not buy (sell high). Similarly, if a stock has dropped like a rock, it may be a good time to buy rather than sell (buy low). You won’t know what to do unless you understand a lot more about the company in terms of EPS, PE ratio, Debt to Equity ratio, operating margins, expansion & diversification plans, order book, peer group comparision etc than its stock price.