Sunday, September 10, 2006

Know When You are Going to Sell a Stock Before You Buy It

When investing in stocks, the agony of defeat is much sharper than the thrill of victory.
Several studies have concluded that investors remember the sour feelings of losing money in an investment more acutely than making the same amount of money in a winning investment.
A few losing investments and an investor can become so nervous that good decisions are all but impossible. For some investors, the mere thought of losing money is enough to make them nervous and emotional about investing.

Emotions can play havoc with your investing because they trump logic unless you have a plan that you prepare in advance and commit to stick with regardless of what else is happening.
Bad Investing Decisions

Emotional investors usually make all the wrong decisions for all the wrong reasons.
It’s important to note that if you fall into this category (and many investors do), it doesn’t mean you can’t be a successful investor. It simply means you have to acknowledge your concerns and allow for them in your investing process.
The safest way to do this is to plan your sell strategy before you buy a stock. Decide a what point you can no longer support the stock and mark that as your sell point.
Consider the normal price fluctuations of the stock and how low you think the stock might fall under relatively normal market conditions.

Selling Point
Find that fundamental point and make it your sell point. This is your exit strategy and commit to writing, so that when things get rocky you can refer to it.
With a plan in hand, you can take the emotion out of the sell decision, which should help you avoid holding the stock too long or selling too quickly.
You can put several strategies into place that will help you take some of the emotion out of sell decisions. There is a delicate tension between selling too soon and holding too long.
On the down side, you can only lose 100% of your investment (the stock goes to $0), however if you sell prematurely what you potentially could lose is unlimited because there is no limit to how high a stock can rise.

Investing Strategies
If you are a “buy and hold” investor, and the stock is rising you don’t want to exit out prematurely, however you also don’t want to see a nice gain disappear if the stock reverses course and begins a sustained downward plunge.
One way to protect profits is to use trailing stops and stop loss orders. These simple trading techniques will help you cover you profits and protect against losses.
These strategies won’t “guarantee” you a profit or protect you against an absolute loss, but they will help you take some of the emotion out of the investing process, which will help you make better decisions. Better decisions means betters investments over time.

There is much emotion attached to money and there is no escaping that fact. You can minimize the influence emotions play on your investment decisions by planning your exit strategy even before you buy the stock.


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