When you should consider selling stock
Beginner Stock Market Investing, Stock Market Investing Advice, Stock Market Investing Strategies
When you are trading stock, one of the hardest decisions to make is to accept a loss on your investment by selling stock and closing out your position. Most traders become emotionally attached to the positions that they take and, because they allow their heart to rule their head, they end up losing money. The key to becoming a successful trader is to control the twin emotions of fear and greed and to accept that you will occasionally make mistakes. Instead of letting your ego get in the way, accepting your mistakes and rectifying the situation by cutting out with the minimum possible damage is an integral part of long-term trading strategy. After all, what counts is the overall return on your investment over the long term and this can be seriously jeopardized if you attempt to hit every ball out of the park for a home run.
Fortunately for you, there are some well tested methods to determine when you should sell stock and here are some of the more useful ones:
-The first strategy is to sell when the stock price hits a predetermined level. This is the approach used by value investors who have bought undervalued stocks and are looking for the right timing to exit their positions. There are several metrics that you can use such as the price/earnings ratio [PE ratio], earnings per share [EPS] or price/book ratio [PB ratio] to determine the level at which you will take profit on your investment. You are creating a situation in which you will receive an alert the moment the stock stops being undervalued. Let us assume that you have bought stock in the company at a PE ratio of 10 and that your analysis of the historical stock price movement indicates an average of 12. You could use the figure of 12 to determine your exit strategy. This way you are creating a logical basis for your position without any emotion being involved.
-In the second strategy, you are adopting a defensive stance and protecting your self against the deterioration of fundamentals relating to your investment. You would set certain standards for the fundamental ratios of a company and if these ratios fall below your benchmark, it is a sign that the financial position of the company is deteriorating and it would therefore be a good time to sell. The financial ratios that you would select for this purpose will normally relate to liquidity and coverage. Let us assume that, like many investors, you’ve picked a utility company for the high dividend and hence as a yield stock. When you bought the stock, the debt to equity ratio was 1 and the current ratio was 1.3. You may decide that your dividend could be threatened if the debt/ equity ratio rose to over 1.5 or if the current ratio falls to 1. Once again, you have logically established a position at which you can protect yourself by exiting the stock.
There are many such techniques that you can use and you should go with whatever works for you. The important thing is to ensure that you are using rational analysis to make your trading positions and removing emotion entirely from the equation.
Tags: Investing, pe ratio, price to earnings, selling stock, stock, Stock Market, Stock Market Investing, strategies, strategy