Market timing is one of the widely used strategies for playing the stock market. It is most often employed by people who do not favor the ‘buy and hold’ theory, which is another strategy used by many investors. People who use stock market timing are those who wish to make profits over a shorter period of time instead of waiting a number of years for their stocks to appreciate in value.
Stock market timing is based on the theory that stock prices are fairly predictable since they follow a repetitive cycle. The theory states that by looking at a stock’s past performance, it is possible to predict its future price fluctuations. Fundamental analysis and technical analysis are two of the most employed strategies in market timing to predict future price movements.
While fundamental analysis concentrates on the company’s financial statements and its earnings, technical analysis focuses on the historical stock price movements of the company in the past. These and other data regarding a particular stock are used in stock market timing to predict future stock prices.
Advantages
Since this strategy can provide higher returns than the ‘buy and hold’ strategy, people who are looking for better profits tend to try this method. A number of analysts provide suggestions and stock market timing assistance, making it easy for traders and investors to use this strategy for trading the share market.
Stocks generally stabilize on their intrinsic value even when they go to drastic extremes due to various external factors. Knowing a stock’s intrinsic value would therefore help in making better judgments on future trends, especially when the current value has veered off from its intrinsic value by a large degree. Studying stock market timing would help investors know when to buy or sell stock looking at the discrepancy in its price.
Investors who have less time to do their financial home work could use a more long-term stock timing approach in combination with index funds.
Disadvantages
Most investment experts opine that the strategy behind short-term stock timing is pure fantasy. They say that if stock prices could be predicted, then almost every trader would be a billionaire today. Even experts like Warren Buffet do not ascribe to this strategy.
Moreover, in order to benefit from this method, investors would have to make a large number of transactions. This would incur a lot of commissions which could in turn eat into one’s profits. The spread provided by brokers, which is the difference between the bid and asking can also take a large portion of the profits.
Long-term stock timing on the other hand is known to provide investors with better returns than the market when calculated in terms of years.
Conclusion
So there are advantages as well as disadvantages to stock market timing. Finally it comes down to each person’s preference and style of trading. While some prefer the ‘buy and hold’ method of investing, others use stock market timing as their most preferred strategy.
