Investing In Hot Markets

The market is “hot”.

The volume of shares traded is skyrocketing. Rumours or stock tips are swirling wildly among investors. The stock market is see-sawing. Droves of people are putting money in the market with the hope of making quick capital gains.

The volume of shares being bought and sold is very high. Your close friend is pestering you to buy a share that he thinks is destined to be a sure winner and he has invested a huge amount of money in this share. As a wise investor, how do you react to such a confusing situation? Follow your head or your heart? Here are some tips.

Have a sound investment plan, stick to it. Do not make impulsive investment decisions. Always start with an investment plan. A good investment plan comes with a clear investment or financial goal and takes into account an investor’s personal tolerance towards investment risks.

The choice of investments should then be based on these considerations. Once you have a plan, stick to it. This plan helps you to make sound and rational investment judgment. It also prevents you from impulsively buying or selling in a “hot” market.

Avoid rumours, do your homeworkFacts. That is what it takes to make sound investment decisions. Avoid rumours or tips. Take some time to do background checks, including the financial position or growth prospect of the company you want to invest in.

Manage your emotions, avoid greed In a “hot” market, everything can be quite confusing and emotions run high. Even the best investment plan can be scuttled due to greed. The best an investor can do is to stick with the investment plan and assess the situation with fundamental knowledge.

Understand your risk profile. No two investors are the same. No two investors have the same risk tolerance. A wise investor is an investor that understands the level of risk he or she can take. If you cannot not stomach the erratic ups and downs of stock prices during a volatile or “hot” market, it is best that you stay away until the market cools down.

Set a price limit. A “hot” market may result in either overpriced stock or underpriced stocks. If you are buying, you must ensure that you do not pay too much for a stock or if you are selling, you must not sell lower than its true or fair value.

So, place a limit order. A limit order is an instruction given to your stockbroker to buy and sell shares at a specified price. This will avoid paying too much or selling too low for your shares.
Be wary of your online transactions Online trading is a convenient way to trade but it can be an investor’s undoing if he or she is not careful, especially in a hot market.

During a volatile or “hot” market situation where trading volume soars, heavy traffic on the Internet may result in delays in matching orders or failure to access the brokers’ online trading system.

Investor, who are not careful in monitoring their online transactions and assume that their orders have not been executed, can end up overbuying (buy more shares than they want or can afford) or overselling (sell more shares than they want to or worse, they do not own).