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Wednesday, October 26, 2011

Shop for Discounted Stocks in Falling Market

The market is in the dumps and everyone is headed for the exits – what’s a smart investor to do? You might consider going on a shopping spree for discounted stocks.

When the markets are down and the mood pessimistic, people tend to sell even if there is no specific reason to let go of an individual stock.

This common trading mistake costs investors dearly. When the talking heads on television and the wags in print and online begin talk of doom, many investors dump their stocks in favour of cash or other “safe” investments.

Rushing Back

As soon as the same crowd gets excited about the market again, the cash investors rush back to the market and buy stocks.

The problem with this approach is that the investor is frightened out of the market when prices are depressed and lured back in when prices have rebounded. In other words, sell low, buy high.

The thoughtful investor always asks why the price of a stock is moving before making a decision.

• Has something changed in the company?
• Has something changed in the company’s primary market?
• Has there been a negative or positive regulatory or legal change?

These are not all the questions you should ask, some will be specific to the industry or sector, but you get the idea.

When you can find nothing in the answers to questions specific to the company, you look to the market.

Is this stock dropping (or rising) because the overall market is moving dramatically in that direction? It can work both ways, although a down market seems to depress overall prices more than an up market raises overall prices.

Shopping Trip

If you are looking to add to your portfolio, consider a down market a great shopping opportunity. A thoughtful investor is going to buy on the potential of a company and if he or she can pick the stock up at a discount so much the better.

This investing approach takes some courage and confidence in your ability to distinguish between a stock price depressed by a down market and a stock that is fundamentally flawed.

However, if you do your homework, you’ll find bargains in down markets that may reward you handsomely in the future.

Don’t be frightened off a stock just because the overall market is sour. If the fundamentals of a company are solid, a down market may be a great time to do some discount shopping.