Avoiding the Impulse Buy

Summary
  • Nearly 40% of all money spent on e-commerce sites are the results of impulse buying – it’s big business
  • Impulse buying is bad. Left uncontrolled, it leads to credit card debt.
  • How to avoid impulse buying
  • Are you compensating for something?
  • We offer suggestions for alternative activities that are good for you
What is Impulse Buying?

The dictionary says:

im·pulse buy·ing
noun

 

Do you impulse buy?

Factoid: Nearly 40% of all money spent on e-commerce sites are the results of impulse buying.

The two most influential factors when making a spontaneous purchase are the special sale price (for a limited time) and free shipping.

Let us ask again, do you impulse buy? Be truthful to yourself now.

For business, impulse buying is a huge opportunity! There is a science behind encouraging consumers to do so. Read How to Sell to Impulse Buyers. Retailers describe these shoppers as emotionally-driven, favoring instant gratification, social status-conscious, and image-concerned, anxious, or less happy/depressed. Techniques that retailers use to encourage impulse buying include:

  • Special sale price, usually “for a limited time”. Why do you think that is?
  • Brick-and-mortar retailers place nick nacks near the checkout counters.
  • E-commerce sites with their easy to use web site with lots of impulse buying suggestions such as “Related items”, or “What others are buying”.
  • The one-click checkout makes it very easy. Too easy. Scary easy. One click and it’s yours. Money changes hands, yours into theirs. No longer do you have to put in your credit card info, your shipping address, confirm the item and quantity. Instead, it’s “bam!” And it’s done.
Warning! The "Buy now with 1-Click" button is conducive to impulse buying
Warning! The “Buy now with 1-Click” button is conducive to impulse buying – disable it now.
Why is Impulse Buying Bad?

Impulse buying is bad because it puts your ability to save money each month at risk, depletes your savings, gets you into and debt, and eventually erodes your freedom.

“Freedom?” You ask.

“Yes, freedom! Freedom to eventually do anything you want, any time you want, and being able to pay for it. And pay for it just once.”

“Paying for it just once?” You ask.

“Yes, just once. When you can’t live within your means, you’re going into debt.”

For most consumers, it’s usually credit card debt that gets them into trouble. When you’re in debt, you pay for the amount you borrowed (the principal) and interest on that principal. And your total payments snowball in comparison to the original amount borrowed. When you make a monthly payment, the first portion of that payment goes toward the interest for borrowing the principal. Then what remains go towards lowering the amount you borrowed. Let’s go through a couple of examples:

Continue reading “Avoiding the Impulse Buy”

Buying Stocks

Summary

  • Investment Rule #1: Buy low, sell high
  • Investment Rule #2: Be prepared for the prospect of losing your entire investment
  • Investment Rule #3: Have an exit strategy
  • Considerations for placing a stock buy order
    • what price, how many shares?
    • market order vs. limit order
    • all-or-none
    • day order or good-till -canceled
  • We’ll show you step-by-step process for buying stocks online

So you have done thorough research and have selected a stock for buying. In this article, we’ll discuss some considerations before you buy your first shares in the stock, show you how to execute a buy order on-line, discuss how to monitor your stock until such time you’re ready to sell your shares.

Considerations Before Placing the Buy Order

There are a few considerations before you go online to place a stock buy order. The first few considerations follow directly from our Seven Golden Rules for Successful Investing:

Investment Rule #1: Buy Low, Sell High.

#1. Buy Low, Sell High. It’s really that simple. That’s how you make money from buying stocks or just about any other investment. (Well, that and dividend payouts.)

Investment Rule #2: Be Prepared for the Prospect of
Losing All of Your Investment.

#2. Are You Prepared to Lose Everything? Make no mistake: stocks are very risky investments. When they say, “No pain, no gain.” What they also mean as a corollary is, potentially “All pain, All loss.” Are you prepared in the event that your investment goes to $0? Because it can. It has happened to me a few times. That’s a few times too many. If you cannot stomach a complete loss of principal, you should not be investing in individual shares of stock. Though still risky, mutual funds or ETFs might be better for you.

Investment Rule #3: Have an Exit Strategy.

#3. Have an Exit Strategy. Just like super spy James Bond would look for exits in case of threats when he goes into a building or a room. You need to formulate an exit strategy before you buy a stock. If the stock goes up, you need to have a concept of how high you would let it go. But, more importantly, if it goes down at what price would you head for the exits and lock in your gains? Or worse, if the price heads down is below your buying price, how low are you willing to “stomach” the paper loss? At what point would you realize your bull thesis is not working out, and would willing to sell your shares and take a loss? Some schools of thought say you should consider selling out if it drops 10% below your purchase price. The concept is that a 10% loss is better than a 25% loss, 50% loss, 75% loss, or 100% loss. And those heavier losses all begin with a 10% loss. Or you willing to cut your losses early and exit your position? Have a plan ahead of time, so you don’t get caught by surprise and having to make a decision when your emotions are high.

#4. What is the Going Price: Get a Quote. Using Advance Micro Devices, Inc. (ticker symbol: AMD), a manufacturer of computer chips, as our example, here is a free 15-minute delayed internet quote from Yahoo! Finance: https://finance.yahoo.com/quote/AMD/

Stock quote for AMD)
Stock quote for Advance Micro Devices, Inc (ticker: AMD) at Yahoo! Finance

Here are the information associated with a stock quote:

  • Current Price – shown here as $12.76, which is down $0.54 from the close of the previous/last trading day, or -4.07% change.
  • Previous Close – price of the last transaction at the end of the last trading day.
  • Open – price of the first transaction of the current/last trading day.
  • Bid – selling price is currently $12.79. The “x 27200” refers to the number of shares that is being sold.
  • Ask – buying price is currently $12.80. The “x 13600” refers to the number of shares that is being bought. The difference between the bid and asking price is the spread, which at the moment was $0.01. Typical for a heavily traded stock.
  • Day’s Range – the lowest and highest transactions so far in the current/last trading day.
  • 52 Week Range – the lowest and highest transaction in the last rolling 52 weeks.
  • Volume – the number of shares transacted so far in the current/last trading day.
  • Avg Volume – the average volume for a typical trading day.
  • Stock Chart – as shown here the 5-day candlestick chart, showing the historical trading prices for each of the last 5 days including today, along with the volume/total number of shares traded along the bottom horizontal axis.

For a real-time (non-delayed) quote, login to your brokerage account during normal trading hours.

Stock Market Hours. Normal hours for stock exchanges is Monday-Friday, 9:30 am to 4:00 pm. The exchanges are closed on the following holidays: New Year’s Day, MLK, Jr Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. And it closes early at 1 pm on July 3rd and Black Friday (the day after Thanksgiving).

#5. What Price? Obviously, this is the hardest question du jour. How much do want to pay for each share of stock? See Investment Rule #1 (above). Try to buy when the stock is selling at a discount, on days of market weakness when the most stocks are going down. Assuming there are no fundamental reasons that you know of why the shares are showing weakness, it’s even a better buy. It’s like buying something you would normally buy at a store for a discount. When you’re buying on weakness, you’re likely to achieve the Investment Rule #1 (see above).

Continue reading “Buying Stocks”

Protect Your Investment: The Stop Loss Sell Order

Summary
  • Investment Rule #3: Have an exit strategy
  • To help protect your investment, consider use of the stop loss sell order
  • When the stock price hits your target stop loss limit, your stock order turns into a market order
  • Use it to sell your shares of stock when the price keeps going down, to avoid deeper losses
  • Or use it to protect your paper gains if the share price drops to your preset stop loss limit
  • Excessive stock price volatility may pose challenges to using the stop loss sell order
  • We’ll show you step-by-step how to place a stop loss sell order online
Have An Exit Strategy for Your Stock Investment

Investment Rule #3: Have an Exit Strategy.

As we discussed in our Buying Stocks article, before you buy for first shares in a stock, formulate an exit strategy. Just like super spy James Bond would look for exits in case of threats when he goes into a building or a room. You need to formulate an exit strategy before you buy a stock.

In Case Your Bull Thesis Is Wrong. We would love to be right in all of our predictions, but if the stock price heads down below your buying price, how low are you willing to “stomach” the paper loss? At what point would you realize your bull thesis is not working out, and realize you need to exit the investment, even at a loss? One school of thought says you should consider selling out if it drops 10% below your purchase price. The concept is that a 10% loss is better than a 25% loss, 50% loss, 75% loss, or 100% loss. And those heavier losses all began with a 10% loss. Or you willing to cut your losses early and exit your position? Have a plan ahead of time, so you don’t get caught by surprise and be forced to make a decision when your emotions are high.

One strategy (following that school of thought above) is to place a stop loss sell order to minimize the down side risk. You would do this as soon as you buy some shares of stock. For example, if you’re prepared to sell should the stock price go south 10%, then place a stop loss sell order at 10% below your purchase price. Maybe your tolerance is not -10%, maybe it’s only -5%, or may be it’s as much as -12%, or even -15%. Whatever your tolerance, consider using this technique to protect yourself from much deeper losses.

ZOES, a bull thesis gone wrong
Zoës Kitchen, Inc. (ticker: ZOES), a bull thesis gone wrong.

In Case Your Bull Thesis Is Right. If you made the right call, and the share price starts to go up in price, congratulations! You’re on your way to become a successful investor.

MTN, a bull thesis proved right
Vail Resorts, Inc. (ticker: MTN), a bull thesis proved right.

As part of your strategy, however, consider protecting your paper gains by being willing to sell it should the price start to come back down. And you should do so before most or all of your paper gains are lost. Figure out ahead of time at what price would you head for the exit and lock in your gains? You can use the stop loss sell order to implement this strategy…

Continue reading “Protect Your Investment: The Stop Loss Sell Order”