Is it possible to buy a stock and hold it for a day or over the weekend and sell it for a profit? We’ve all seen times when news of a certain stock comes out and that stock price jumps double digits, but do regular everyday business stock prices fluctuate enough to buy one day and sell the next. I have to admit when I did this weekend stock trading as a short term experiment I wasn’t planning and such a high turnover rate.
Short Term or Shortest-Term
I wasn’t always thinking of what the shortest term I could hold to result in a decent annualized return. I was originally planning on holding onto the stock for a few weeks or even a couple months at first. Since most of the stocks on my watch list I have because I am OK if they drop in price slightly and I need to hold for a longer period to recover because most of the stock on the list have a strong dividend payout.
But I had already done short-term trading a few times earlier and continue to do that strategy. However, this time when I traded on Friday and came back to see that I was up Monday morning, I saw an opportunity to sell and make a quick profit. I decided I then that I wanted to see how quickly I could turn my stock trade around and what annualized rate it would result while sharing my results.
Planning for the long-term
The trade itself could be done with almost any stock out there. Stocks move in price higher because of the growth factor, while others are cyclical and could be almost anticipated, or income and dividend stocks try to stay fairly consistent and pay out dividends instead of price changes. However you trade, you must plan for the long-term. That doesn’t mean though that you need to HOLD the stock for the long-term.
Planning for the long-term means that you have an idea of when you would sell the stock if ever, and what your next move will be. If you don’t have a move for your plan, then why are you selling? It’s better to have your money working for you then sit in your cash account barely earning anything. But planning requires knowing the next step. Always ask yourself if you want to become a more active trader which will trade more frequently or if you will be a more passive trader who will buy and hold for the long-term.
The Trade – On a Friday
I previously had been watching and chose to trade the stock NexPoint Strategic Opportunities Fund NHF. As you know I enjoy researching closed-ended income funds, they always make a great long-term holding option, even if you don’t always hold them long enough to receive the dividend benefit. I had previously held onto Pimco High Income Fund PHK and sold it and noticed NHF was one of its peers. I used the platform Robinhood to minimize my transaction fees as well as utilizing a limit order when selling to make sure the stock would sell for what I wanted it to. As a side note, if you use the Market Price feature Robinhood has a tendency to sell it for lower than you’re expecting so they can get a better price on their side.
I bought NHF on 1/25/19 at $21.46 a share. Looking back it was a high price per share especially considering how much lower it’s trading today, but if it was going to be a long-term hold I was less concerned of the share price. I had originally put in a limit sell order for $21.67 which would be a 1% gain. I figure if I could get that in less than a month then it’d be a decent return. This was on a Friday afternoon and I left to enjoy my weekend.
Coming in the Monday morning I noticed that the stock had been up already, not much but then the thought came to me that I should see what my annualized return would be for the single day trade. On Monday morning of 1/28/2019, the stock was selling for $21.52 a share, so I adjusted my limit sell price to match and the trade was complete.
The price difference of $21.46 to $21.52 is only $.06 per share increase. Which compared to my initial 1% was really not that much, but I was wondering what a single day trade return would be.
Calculating the annualized return there were a few ways to do it. You could figure out the number of days over the length of the year. Or you could also calculate the number of business/trading days and use the number of business days you held compared to the total business days which is 252 days.
We will use the calculations found here from fool.com. First, we will do the annual rate:
The amount gained is $.06, we will divide this by the current value of $21.52 and get a gain of .002788. Or .27% gain, it’s still small, about a quarter of the 1% we were waiting to receive. But now we use the formula :
Annual return – [(return + 1)365/Days – 1] * 100
When we input our Return and add in the 4 days then we get the annualized return of 28.92%, that is counting us holding it all day Friday and Monday. If we consider closer to 3 days you get a return of 40%. Either one of these is much greater than the average return of the stock market over the past few decades. But the assumption is made that once you sell you will need to find the same return that day and make another trade.
Annual return – [(.002788 + 1)365/4 – 1] * 100 = 28.92%
Annual return – [(.002788 + 1)365/3 – 1] * 100 = 40.31%
Now if we update the formula to be 252 instead of 365 and leave it 252 divided by 1 day we still end up with 252 and the formula looks closer to this:
Annual return – [(.002788 + 1)252 – 1] * 100 = 101.69%
A return of 101% is amazing!!! If I could lend out $100 and the next day earns $.27 one day and then compound it each day and receive $201 at the end of the year most of us would take that investment any day.
From my weekend stock trading experiment it brought up four good points.
First was to make sure that I used a trading program to eliminate transaction fees that would have never made a trade like this possible.
Second is to put in limits to trade and buy/sell for what I input as the price. Another trade I was doing went up 1% within 2 days but I forgot to put a limit on the sell so it adjusted the sale price automatically to be .33% instead. Now I always set a limit sell even if I input the current market price.
The third is to have a plan in place. Taking quick short-term gains is good, but if I never traded again I would have only earned .278% for the year. If it had taken me a month to get that return then my annualized return would have been 3.34%. At that point, I would have been better off earning dividends on an income fund. Have a plan in place, watch a handful of stocks and know what a good price is for it or if one has an extreme drop and be prepared for a possible rebound.
Fourth is to remove the emotion from the trades. We’ve talked about this before but the reasons we recommend limits, especially selling limits that are set immediately after you have purchased the stock, is to remove emotion from the transaction. All too often we all play the hypothetical “what if” scenario. What if we decided that a $.06 gain was good, but tomorrow it may go up to $.09, or a day after that up higher to $.20. This makes us greedy and should be removed so we can logically capture our profits and move on with our plan to find another investment.
There may be a handful of times when you look back and kick yourself saying, “I could have gained so much more if I held on a few more days/weeks”. But for those rare handfuls of times that you see those, there will be others where you will say “I’m glad I cashed out when I did or I’m glad I took my profits and could move on.”
Are you ready to take action into planning for your upcoming trades?