First, always set a loss limit. Know when to get out when you are losing money. Depending on your goals you may want to set a 5-10% loss to trigger a sell.
Now if you are like me and when you got started you had no idea what a loss limit was, then you may have a few that have lost big. Here are 4 questions to ask before you sell:
Is this a long term goal/investment? The beauty of the stock market is that it does bounce back. Depending on the industry and the company, you could see it bounce back.
Is it a good value company? Do your homework. Is it a good value stock. This is a good sign it could bounce back.
How much are you down? If you are down over 25%, then it may be time to sell and take the hit. Keep in mind that farther it goes down the more it has to earn to bounce back to your entry point.
Can you off set your winnings with this loss? Taxes! Uncle Sam gives investors some breaks. One is that you are taxed on your profits minus losses. Check the tax law or a trusted accountant for more details.
If you have other suggestions, please leave a comment below!
A big mistake I made starting out was the idea to not sell. Several books and talking heads on TV said “Don’t sell!” My question for them was always the same, “Why not? Isn’t that how I make a profit?” Fortunately, the TV never spoke back to me.
Yes Virginia, its ok to sell your stocks.
Sell for only two reasons:
1. Take a profit
2. Limit a loss
Unless you have invested in a stock that pays a dividend, the only way to make money from your portfolio is to sell. It took me almost a year to figure that one out (duh!). If the stock is at a point where you are happy with the profit, don’t worry about the “what if”. Buy it again later and make more money. There is no reason you can’t re-buy a stock.
What about the commission?
There is no such thing as a free lunch. You have to pay a commission to both buy and sell. I’ve always made the commission part of my bought price. If the stock was $15 and I bought 100 shares, it cost me:
$1,500 + $14 ($7 buy + $7 sell) = $1,514
Divide that back to the individual stock price ($1,514/100) and I paid $15.14 (that’s my break even number, more about that later) for the stock. Now if the stock goes to $16.15 and I sell, that’s 10% profit ($100). It’s ok to laugh at my small numbers, I’m just a part-part time trader.
What about taxes?
Depending on how long you keep your stock determines how much taxes you pay. When I started out I was worried about paying the taxes. I read in the vast investing books that I collect, you were supposed to keep the stock for a year + 1 day. Bull crap! Really! If I can take a profit ($100, $1,000, $10,000), I’m taking a profit! Dear Uncle Sam is going to always get a cut, why jeopardize MY profit worrying about his cut.
Limit your loss
The stock market can go down, down ,down! And sometimes it can go down, down, down really fast. Limit your loss. Don’t let the sinking ship drown your hard earned money. Just like taking a profit, you can always re-buy later. Keep in mind there is a catch to re-buying on a loss. The IRS will not allow you to offset your gains with your losses if you re-buy a stock in a certain period of time (confusing, yes, more on it later as I figure it out!).
I don’t normally trade stocks under $10 (I have and I’ve made money). The lure of catching that next great stock that rockets from single to double (or even triple!!) digits can be so alluring. So, I finally broke down and subscribed to Investor’s Business Daily’s “Top-Rated Stocks Under $10”. I’m hoping this service will help me pick good under $10 stocks. My opinion of stock suggesting services is simple: Make me money and I’ll keep subscribing.
Here is my strategy so far:
1. Small amounts
No more than 25% of my cash in one stock. This will limit my risk.
2. Diversify
No two stocks in the same sector. Diversification is always a good option. This will hopefully keep me from being killed by any bad news for one sector.
3. High Relative Strength (RS)
4. Positive EPS
For annual and next /last quarters. I’m picky about investing in profitable companies.
5. Volume %
I want to see activity on the stock. That may be a good sign of a break out and PROFIT!
6. Simple Moving Average going up
Never invest in a sinking ship.
As I try out this new strategy, I’ll make changes as needed. My goal is to have a strong under $10 strategy that I can use to help increase my portfolio.
Like all valuable lessons, this one cost me money. I did my research and bought my stock. This was the one (aren’t they all). I set my alerts to notify me if it dropped below 5% of my buy point. I even went as far as to set an automated Sell Limit to take profits when the stock would hit (because I knew it would!).
All was well, except!
Meanwhile at my day job (I don’t trade professionally), I was in a meeting and my cell phone was going nuts (I was losing money). I couldn’t leave, I couldn’t sell, I was stuck. Once I got back to my computer, I sold the stock for (yikes!) an 8% loss instead of the 5% that I originally planned (just in case). Moral of the story, I need to set automated Stop Loss and Sell Limits to both protect and profit.
Another reason to automate is to protect from the greed voice. That little voice that whispers, “What if it goes higher?” or “It’ll go back up, really!”. It’s rarely right.
I learned my lesson and hopefully you too won’t make my mistake.
This is a horror story of making and losing money in one hour. One hour!
I bought my stock, set my alerts for my sell price and my loss price (not all are winners and I’m ready to cut my losses after a certain point). Cell phone was charged and ready. The stock was bought on Monday and I knew (yes KNEW!) it would hit my sell point within a few days. I was right. It hit the next day. My cell was buzzing with anticipation of profit! It sang and cheered! It vibrated all over my desk, SELL SELL SELL!
I didn’t sell. No I wasn’t breaking my rules for greed. I didn’t know. I didn’t have my cell phone with me. An hour later, I picked up my cell phone to see the alert! Yes! Profit!
No!!! The price had dropped to just above my loss sell point. The stock peaked where I expected it too (sometimes I get it right). So, the profit that I was expecting turned to a loss and the stock kept dropping. Fortunately, I kept with my rules and sold at the loss limit.
If you are like me and can’t monitor your stocks at the pace that they change, learn from my mistake. Keep your cell phone with you when you expect an alert and always set a Sell Limit. It’s the difference between profit and loss.
Tip:
Set to automatically sell at your expected sell point. No emotions and you get to walk away with the profits without the worry.
