When is the best time to sell a stock?
It’s always easy to buy something than to sell something. I always
find myself buying things on impulse, I ended up owning things
that I don’t really need. Same goes to stocks. How many of you
actually own more than 10 stocks in your portfolio? I won’t be
surprise if I see 8 out of 10 raise their hands. There are many
reasons contributing to that, but the most common reason is
because those stocks are making losses, it’s too painful for them
to get rid of the losing stocks. They become “junk” stocks in your
portfolio.
Call it human nature. People don't like to admit they're wrong.
But it makes no sense to hang onto a plummeting stock, as you
lose the opportunity to replace this bad investment with a better
one. You may also lose the confidence to move back into the
stock market even when the time is right. Hence, if a market
doesn't do what you think it should do, get out.
Four Exit Strategies
1. Sell when the stock price reaches your target
I would recommend investors to apply 3-to-1 reward to risk ratio
on their stock investment. That is: if our target profit is 30%, our
cut loss point is 10% below purchase price. If our target profit is
60%, cut loss at 20% below the purchase price. Before you make
the purchase, make sure you note down in your own trading
diary about your profit target and the cut loss point for that
particular stock.
So, when the stock reaches the pre-determined target, sell!
2. When the stock drops by X%
Similarly, when the stock falls below your cut loss point, sell!
Many traders set that lower band in the 6% – 8% range,
depending on the volatility of the stock. They may not be happy
about a small loss, but they make sure it doesn’t become a big
loss. (While traders are for short term, investors are for longer
term perspective. Hence, investors can tolerate much higher
losses than traders.)
3. When the stock is over valued
When stocks are pushed way past their true value, they are more
vulnerable to a plunge. The strategy is to sell when they are over
valued and buy them back later during a market correction. This,
of course presumes an accurate knowledge of the top and bottom
of prices – something very few of us are particularly good at with
any consistency. Selling an over-valued stock is certainly
preferable to buying an over-valued stock. Just be prepared to
watch it keep going up after you sell, as happens sometimes. Don’
t second-guess yourself; it could have more easily gone the other
way.
4. Fundamental change in the company
The investor bought the company because of its fundamentals
and its business plan. When something changes and the company
loses its way, the investor has to re-examine whether it is the
same company or not. Maybe a new CEO takes the company off
in a direction that the investor (and market) believes is wrong.
Every stock investor should be disciplined enough to sell stocks.
This will greatly enhance your profits in the stock market.
"Like the cosmetic industry, the securities business is engaged in selling 'illusions'." Paul Samuelson |
| Tip #5 - The Exit Strategy |
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