When a Stock You Want to Buy Takes Off

You do extensive research and analysis to determine whether a particular stock is a good buy or not. Just when you are ready to make your move, the stock takes off like a Roman candle.

What happened? It could be a number of things, but for our purposes, one of the events that plague cautious investors is when a stock suddenly becomes “hot” for reasons that are only remotely supported by the company’s fundamentals.

It could be an industry announcement that puts the company in a favorable light or a positive comment about the company by a respected industry analyst. Traders connect the dots and jump on the stock.

Traders Pile On

Sensing momentum, more traders pile on pushing the price up (this can also work in reverse if the news is bad pushing the price down).

Meanwhile, you really wanted to own this stock and although you may be tempted to jump on for the ride, you know the stock’s price has lost all touch with the company’s fundamentals.

Your best play is to sit back and wait, in most cases. The original purpose of buying the stock was to participate in its growth. If it has already grown in price, you no longer have an investment premise for your purchase.

There is not much you can do when a stock’s price no longer reflects the company’s reality. In hyper-bull markets like the late 1990s, this was a common occurrence. It still exists today, just not in such large numbers.

Speculation

Buying stock under these circumstances is speculation, not investing. Investing means you buy stock with potential for growth, not stock that is inflated by speculation.

What if the reverse happens? The stock you want to buy tanks for no reason that you can tie to company fundamentals.

This could be a good thing if you can determine that the dip is temporary because it will give you a lower entry point.

For the long-term investor, a company with solid fundamentals and a beat up stock price sounds like a great buy.

Before you jump in with both feet, double check you work. Does the market know something you don’t? Is there some reason to think the price won’t rebound and continue to rise?

Test Yourself

This situation can test your self-confidence as an investor. Fortunately, you can look for other opinions on the stock and double-check your position.

If you still feel confident about the company after re-checking your research and listening to other opinions, proceed with your investment plan.

Conclusion

Don’t let the market push you into a trade you know is bad just because you have invested time and energy into the research. It’s better to walk away and find another deal that makes sense.