WHEN TO BUY AND SELL STOCK
WHEN TO BUY AND SELL STOCK
To answer the question "When to buy and sell stock?," there are a couple of important things that need to be determined.
SETTING PROFIT TARGETS
Setting profit targets that determine at what price you are going to sell a stock generally should be established before purchasing a stock. This is crucial as it may help you maximize your returns if you are disciplined and stay true to your objectives.
Unfortunately, all too often, greed supersedes discipline. For example, let’s say Frank buys shares of the Shampoo Company at $150 and sets his profit target at 10% (Selling at $165). Sure enough, the stock eventually rises to $165. Unfortunately, Frank doesn’t sell, holding out for even more profits. Unfortunately, a week later, Shampoo Company comes out with some bad news and the stock drops to $140.
As such, Frank lost $10 per share on his original investment, but 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, but instead, he got greedy and his emotions clouded his rational judgment. While it does make sense to re-evaluate your investment and your expectations for that investment periodically over time, it is typically a good practice to maintain objectives and document your motivations for buying or selling that security, so that you avoid letting the excitement of growth get the better of you.
Similarly, emotion also plays a part when it comes to the downside. I know nobody likes to lose. But more often than not, undisciplined investors get too attached to their investments and don’t want to admit defeat, always assuming or hoping that the stock will recuperate its losses. However, sometimes the fundamental outlook of a company can change, so it is in your best interest to monitor the situation, reevaluate your expectations, and, if need be, cut your losses.
“Your first loss is your cheapest”
Doing so, allows you to reallocate your money to a better investment opportunity. Oftentimes, taking a loss can also be in your best interest for tax purposes, as realized losses can offset capital gains from other investments, thus reducing the amount of tax you’d need to pay. (The fancy term for this is tax-loss harvesting.)
In general, buying a stock can be an intimidating activity for new investors. Questions like “What if I pick the wrong one?” or “What if lose money?” often pop up and discourage investors. However, there are some tips and tricks that can help you when picking a new stock to buy and will reassure you that you are making the right decisions.