| A&A Morning Glory Learning Sdn Bhd |
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.
| "Never invest in a business you cannot understand." Warren Buffett |
"Like the cosmetic industry, the securities business is engaged in selling 'illusions'." Paul Samuelson |
| Copyrights 2005 by A&A Morning Glory Learning Sdn Bhd. All Rights Reserved. |
| Available in all major book stores in Malaysia ! |
| Tip #5 - The Exit Strategy |
| New Book |
| Quotes |
| Quotes |
 | |  | |  | |  | |  | |  | |  | |  |