Know When to Sell
Knowing when to hold and when to sell a particular stock is an art in itself. You may have every intention of sticking with your investments for the long haul, but the first sign of turbulence sends you into a panic to sell. History has revealed that holding onto solid stocks for a minimum of five to ten years has produced the best results. Therefore, buying good companies and holding them for the long term is a sound strategy for most investors.
When you decided to buy your stock, you thoroughly researched its balance sheet, income statement, and ratio analyses. The same holds true when you're thinking of selling a stock. Before you jump on a sell bandwagon because of something you see on the news or hear at the water cooler, reevaluate your holdings carefully. If the share value is still growing, selling too soon can mean you will miss out on additional profits. At the same time, though, you don't want to hold on to a losing stock. Selling at the wrong time can easily destroy your investing plan, so don't do it on impulse. And don't worry about losing your shirt; there's a simple way to make sure that doesn't happen.
Whose advice should I avoid when it comes to choosing investments?
No one's! Always get as many opinions as you can about which companies to invest in. There is something to be learned even from bad advice. Consult coworkers, friends, family, and any other resources available. Once you can discern between good and bad guidance, you'll be better equipped to make an informed decision and the choice that's best for you.
The primary way to lock in your profits and limit your losses is with a standing stop-loss order. A stop-loss order is a specialized instruction to your broker that tells him to sell a stock when its price has declined by a certain percentage. A stop-loss can be placed based on the original buy price, or it can move with the stock price (called a trailing stop). Here's how it works: Suppose you buy a stock for $10 per share. You want to limit your losses to 10 percent. You would place a stop order for $9 per share, which means that if the share price fell to $9, your broker would automatically sell the stock.
With a trailing stop, the sell price increases proportionally when the stock price goes up, helping you both limit losses and lock in already earned profits. Suppose you bought that same $10 stock, and you want a 10 percent loss limit. When the stock goes up to $15.00, your trailing stop increases to $13.50, 10 percent less than the new share price.
