I understand buy low and sell high, but then what?
If, say the S&P500, keeps growing there is no ‘peak’ to sell at. Do the gains compound? if so how? Or do you just hold it forever and sell when you want to get the money?
In: Economics
You buy it low. You then hope the company grows, and its share price increases. Then when you want the money, or when you think the company’s going to stop growing, or you simply want to diversify your investments – you sell.
So for example, if you want to buy a new house, you sell. Or if the share price has expanded so much that it’s now too large a portion of your portfolio (eggs in one basket), you sell. Or if you “got a hunch”, you sell.
Day-trading, buying at troughs and selling at peaks, is gambling. People who really invest in stocks do so because, over time, most stocks will go up, because the economy as a whole continues to grow.
Obviously some businesses fail and their stock value plummets, but if you invest in a spread of stable, reliable companies, you’re essentially putting your money in a bank with a lot higher interest than your literal bank. There might be temporary ups and downs, but over time the average trend is up, and yes, you cash out when you need the money, like to invest in a house or to pay for retirement
> I understand buy low and sell high, but then what?
There is no “then what”.
Buckets of apples cost $10 today. You buy a bucket of apples. Tomorrow, they’re selling for $15. You sell the one you bought yesterday. You made a profit.
You buy a stock for however much it costs today. Maybe you’ll sell it tomorrow. Maybe you’ll hold on to it. That’s up to you. If the price of that stock goes up, you can sell it for a profit. If the stock of that price goes down, either you just keep holding it or you sell it for a loss.
That’s it. It’s simply gambling.
Yes, it can just keep growing indefinitely if you buy and hold something like a broad index fund. Yes, annual gains would be compounded… if you invested 1000 and it went up 10%, you’d now have $1100. Another 10% increase would be $110 gain, not $100. Or if you buy and sell individual stocks, there are always going to be ones that move differently than the market as a whole. So you might sell Apple to buy Nvidia if you think one’s growth has plateaued and the other has upside.
There are a few ways to make profit in the market, Buy low sell high, Short the market (Bet that a stock will go down) and Dividends (basically a company pays you to own their stock.) Some people live off dividends. Just having huge amounts of money in high paying dividends and do absolutely nothing and get a check either monthly, quarterly or annually. Some people make HUGE amounts of money fast by buying options which is even riskier than buying stocks or mutual funds.
You buy an asset and hope it appreciates so that when you sell it it makes profit. Why does it appreciate? Because people want it. Why do they want it? Because they think it will appreciate. On and on the cycle goes. Some part of a stock’s price has to do with the fundamentals of the underlying company it represents, but a big part of the price also stems from arbitrary and intangible sentiment and expectations towards the stock.
The reality is that no one can predict market movements accurately so while ideally you want to buy at the lowest and sell at the highest, even if you manage that it’s still mostly luck. Realistically what you’re doing is buying at a perceived low and hoping that you will sell it for more than you got it for.
One of the best strategies for growing wealth over a lifetime is to buy-and-hold a diversified portfolio (e.g., an S&P 500 index fund) whenever you have spare money (e.g., 15% of your gross paycheck), only selling when you need the money in retirement or a very severe emergency occurs. It is recommended to have ~6-12 months in expenses in safe assets (e.g., a high yield savings account at Ally) for emergencies to reduce the odds you will have to dip into your retirement investments.
Yes, the gains compound. The growth rate that is commonly used is called the “compound annual growth rate.” From 1980 until today, the S&P 500’s CAGR is about 12%. Keep in mind this is just an average value that is dependent upon the start and end dates of analysis. The S&P 500 may decline a lot very rapidly (~30% in a month at the beginning of the pandemic) or slowly (~50% over 18 months during the Great Financial Crisis). However, historically the S&P 500 has always recovered… eventually.
> Or do you just hold it forever and sell when you want to get the money?
Yes you basically hold until you need the money , the longer the better.
Invest when you are 20-30 and keep investing and the investment will grow over 30-40 years. You do not sell until you need the money .
There are two separate ‘strategies’. One is you invest in a company that is valued low but you think will do well, so you buy cheap, then if and when the company grows substantially you sell. That might be because you believe they’re overvalued now and the stock might reduce soon for example. The second option is you treat the stock market like a bank – you invest in a mature, stable stock with essentialy zero risk. It’ll slowly rise and you just keep your money there forever or untill you want to use it – just like in your bank.
There are various ways to make money. One is dividends. Many companies give a share of their profits to the shareholders via a dividend. For example, Ford pays a 15 cent per share dividend a quarter. So if I own 10 shares of Ford, I will get $1.50 from them every 3 months. Though it’s important to note that a dividend is not guaranteed and companies may choose to stop or reduce it. But most companies try to keep their dividend steady and slowly increase it over time. Companies in the S&P pay on average about a 2% dividend per year.
As for the long term money from stocks, this is buying low and selling high. If I buy $1000 of the S&P today, and I sell it in 20 years for $5000, then I’ve made $4000. I don’t know when the best time to buy or sell is, but if I assume the stock market always increases long term, then now is a good time to buy, and the future will be a time where I can sell for a profit.
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