Set Profit Targets

Setting profit targets is what you should generally do before purchasing a stock.

A profit target is a price at which you are going to sell a stock to take profit. This is crucial, as it may help you maximize your returns if you keep yourself together and stick to your objectives.

Unfortunately, all too often, the power of greed supplants discipline.

Take for example: Frank buys shares of a certain Shampoo Company at $150 and sets his profit target at 10%. This means that he’s going to sell them at $165. And yet, when the stock eventually rises to $165, Frank decides to hold onto his shares in the expectation of more profit later on. Unfortunately for him, a week later Shampoo Company comes out with some bad news and the stock drops to $140. As such, Frank loses $10 per share on his original investment. Yet his opportunity loss is $25 per share as he could have sold at $165. If he had stuck to his original assessment, he could have been viewed as a genius. Yet Frank got greedy and let his emotions cloud his rational judgment.

It does make sense to reevaluate your investments and your expectations for those investments over time. But it’s also a good practice to stay true to your objectives, and document your motivations for buying or selling that security. Don’t let the excitement of further growth get the better of you.