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What is Timing the Market?

KD Morgan
KD Morgan

Timing the market is a strategy to buy and sell investments at a preferred price. This includes stocks, bonds, commodities, mutual funds, index funds and real estate. Every financial market experiences fluctuations in their trading range based on news factors such as financial reports, news reports that directly impact the company or product, stock and bond payouts, supply and demand, and the economic health of the industry and nation.

By studying these indicators and the cycles of your particular vehicle of investment, you can predict the market direction. This will enable higher returns as you buy and sell at premium prices. The goal in timing the market is to buy as the price bottoms out and begins to gain momentum and to sell just before the price peaks. Several market strategies are available to help predict where your investment instrument is in the cycle.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

The Price/Earnings ratio (P/E), the dividend yield, the price-to-book ratio, the prime rate and the federal funds rate are a few examples of ways to monitor investments for timing the market. Many brokers and investment strategists monitor the up and down cycles and the existing conditions at the time in order to predict market trends. It is important to remember that buying on news is not a good market strategy because by the time news is announced regarding a particular investment instrument, the market has already factored it into the price.

When purchasing mutual funds or index funds, you are buying a composite of securities and the price will not be as volatile. It is helpful to investigate the trading curve for the last few years. This will show you the pattern of the curve so that you can predict when the best time to buy and sell.

The real estate market moves in longer, slower cycles, which suggests staying power is your best strategy for timing the market. For securities, many order types are available in timing the market. Each is unique, depending on your goals and preferences:

  • “fill-or-kill order” – instructs a broker to sell an investment at the specified price or better. If the transaction is not immediate, the order is canceled automatically.
  • limit order” - specifies a buy or sell at a specific price or better.
  • market order” - will negotiate a transaction at the current market price.
  • “market-if-touched order” - is similar to a stop order in that it becomes a market order if a specified price is reached. However, a buy market-if-touched order is entered at a price below the current price, while a sell market-if-touched order is entered at a price above it.
  • “not-held order” - allows floor brokers to take more time to buy or sell an instrument, if they think they can get a better price by waiting.
  • “one-cancels-the-other order” - two orders in one, generally for the same security or commodity. This order instructs the floor brokers to fill whichever order they can first and then cancel the other order.
  • “specific-time order” - couples many of the other order types with instructions that the order must be carried out at or by a certain time.
  • “stop order” - tells a floor broker to buy or sell an investment once a specific price is reached. These are often called “stop-loss” orders because they are frequently used to protect profits or limit losses.
  • “stop-limit order” - turns into a limit order when an investment trades at the price specified in the order. Unlike stop orders, they demand that the trades be made only at a specified price.
  • “short” - is to sell stock before buying it in the hope that the price will decline, allowing the investor to purchase the shares at a lower price.

Timing the market can be more certain when predicated on these safeguards. In all legs of investing, buying low and selling high is the purpose, strategy and goal of timing the market properly.

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