Ask a bunch of people why they buy and sell stocks, and you'll probably hear answers such as "to accumulate money for retirement," or "to put my kids through school."
Those are high-level answers. There are also some interesting answers at a lower level, explaining why we actually pull the trigger on a stock at a given time -- and our friends at Scottrade have unearthed them. The brokerage asked many of its active traders (with $25,000 or more in their accounts) what triggers them to buy or sell a stock. (Learn more about Scottrade and some of its brethren in our Broker Center, where you'll also find a handy comparison table, among other things.) Here are some of its findings:
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The top reason is a price change, cited by 38%. If a stock rises or falls significantly, it will cause many people to buy or sell it.
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A stock's volume commanded the attention of 19% of respondents, suggesting that many are swayed by seeing a lot of shares trading hands.
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News about a company was a trigger for 17%.
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Volatility was a trigger for 7%.
The results are interesting, but not very encouraging. Volatility, for example, doesn't seem like a great reason to buy or sell a stock. (I addressed this in a previous piece on beta, a measure of volatility.) Neither does volume. For instance, financial stocks like E*Trade Financial (NASDAQ:ETFC), Countrywide Financial (NYSE:CFC), and Citigroup (NYSE:C) have dominated the top-volume lists lately, but that doesn't mean they're the best investments right now. And when you see Sirius Satellite (NASDAQ:SIRI) or Ford (NYSE:F) in the top spots, does that make you want to rush in and buy? I hope not. They each have issues worth pondering before investing. Granted, they may end up as strong long-term performers, but it's not their volume that will suggest that. This is where news and research come in handy.
Better triggers
I wish the No. 1 or No. 2 reason were something like, "I finished researching the company and crunching many numbers and I did (or didn't) like what I saw." Or "According to my calculations, the stock is worth much more (or less) than its current price, so I acted accordingly." These are the kinds of reasons you should have when you buy or sell a stock, instead of volatility or volume.
The survey results also don't tell me enough. Reacting to news can be smart, but remember that many times, by the time you learn about news, it's already been factored into a stock's price.
Similarly, a price change can be a good trigger, if a company that you've long wanted to own suddenly drops sharply due to a temporary issue. If you don't have a watch list, consider starting and maintaining one. I've found it rather handy, myself. You could set up a portfolio online (at Yahoo! Finance, for example, or on AOL), where you add companies that you may one day like to buy. If you pretend to have bought them at their current price, as the weeks and months go by, you'll be able to see at a glance how much they've risen or fallen from that price. If you pretend-buy them at what you think is their fair price, you'll be able to see how close they stay to that price. Scan through your watch list now and then and you'll occasionally see potential big bargains waiting for you.
Here's one more trigger I'd like to suggest: Invest just because it's that time of the month, or quarter. In other words, commit to investing a certain amount each month or each quarter. When the time comes, choose the most promising stock you can find, which might mean adding to a position of stock you already own. (Indeed, that can be a good thing to do, lest you end up with 150 stocks, and no way to keep up with them all.)
So before you place your next trade order, think about why you're doing so, and make sure your triggers are logical ones.
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