Beware when investing in active stocks. When a stock hits the front pages of the financial news because of high trading volume it may not be because the company is doing well. A current example is JPMorgan. The largest bank in the United States, JPMorgan Chase is in the news because of trading losses of well over $2 Billion in the last month and a half. The company has assets of roughly $2 Trillion so it not going bankrupt over the recent losses. Nevertheless the stock price has fallen. If you are interested in investing in active stocks you would probably wait until this one bottoms out and then hope to get a deal on the stock price before it recovers. However, if you are considering holding this stock for the long term fundamental analysis is in order. And that fundamental analysis has to include just how this company of so called professionals managed to lose so much money in equity swaps over such a short period of time.
Timing when Investing in Active Stocks
The best time to have sold JPMorgan would have been at the end of last week before the company announced its recent losses. Since that was not possible the best time to buy the stock will be when it has lost its maximum before recovering. However, if you are interested in investing long term in this company you want to look at discounted anticipated earnings over time, the stock’s intrinsic value. Considering what is happening in Europe, banks may get hit across the board. The Greek debt situation seems to be leading to a Greek financial collapse. That may lead to debt defaults in Spain, Portugal, Ireland and Italy, the rest of the so called PIIGS group. Runs on banks in these nations are quite possible if they have a lot of Greek debt in their portfolios. Later you can include debt from the other countries listed. The contagion could spread to banks in the USA and then stocks of JPMorgan, Wells Fargo, and the rest could be suspect. Investing in active stocks could then be a matter of waiting, again, for a slide stock prices to reverse itself.
Short Term Investing in Active Stocks
Active stocks that have gone down in price do not always deserve the price drop. For example when another company attempts a hostile takeover the stock price may rise on speculation and the willingness of the potential buyer to bid up the price. If the buyout fails and is overleveraged the stock price may fall dramatically, below the price that fundamentals would support. In this case short term investing in active stocks is a good idea, provided that you have done your homework. Buy when the stock bottoms out and sell when it comes back to a reasonable price. Then keep the stock only if it is a good stock investment based on its long term fundamentals. As always we are not suggesting that one buy or sell JPMorgan or any specific stock. The point of this discussion is to present an example of thinking through the process of investing in active stocks.