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(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

Sell Your Shares At The RIGHT Moment

There is a common saying in the market that 'you make profits when you sell, not when you buy'. 

Most investors experience anxiety when it comes to selling their stocks. Suppose you bought a share at Rs.100. One month later it has jumped to Rs.125. 25% returns in just one month! Isn't that great! Will you sell and book your profits?

More often than not...you won't. The reason - Greed! You would hold on in the anticipation that it will go up further and you will make more money.

Take the other scenario. Now the price, one month down the line, has fallen to Rs.75. Too bad! Will you now sell and book your losses?

More often than not...you won't. The reason - Loss Aversion! You would hold on in the hope that it will move back to Rs.100 at least and you will recover your losses.

In both scenarios, played time and again, you let your emotions rule your investment decisions. The end result is that you either lose money or do not realize the full the potential of your investments.

That's why financial experts repeatedly advice that investors should have a selling strategy in place...before they even consider buying.

Decide on your stop-loss percentage
Fix a stop-loss limit - always - and the moment your stock touches the same...get out - always.

Don't HOPE for the stock to recover. More often than not, it is this failure to accept loss at the right time that makes people lose money on the stock exchange. (Imp: If the stock recovers after you have booked a loss, don't regret.)

On the face of it, this may seem to be a defensive strategy. But more often than not, it is this defensive strategy that maximizes the overall returns.

Moreover, with minor losses you still have a chance to play the market another day. With huge losses to recover, one might be tempted to take aggressive risk, further jeopardizing one's capital. Too huge a loss can also permanently put you out of the markets.

Decide on your stop-gain percentage
As mentioned in the beginning, you make profits when you sell. Therefore, when you decide to buy a stock, also fix a price level at which you will sell. Suppose your research shows that the stock, that you plan to buy, has a potential to appreciate by 25% in next 6 months. So your strategy could be to sell 1/3rd of the stock when it appreciates by 15%, next 1/3rd at 20% appreciation and the balance at around 25%.

Further, at each stage, you must re-research your stock to check whether your earlier assessment of 25% expected upside still holds true or not. If the momentum is too strong and the fundamentals do support higher appreciation, you could modify your strategy to sell 1/4th at 15% appreciation, 1/4th at 20% appreciation, 1/4th at 25% appreciation and the balance at another 5-10% appreciation.

Don't be under the false impression that you can catch the peak.

Don't ignore the time aspect
Your research shows that the stock has an upside potential of about 25% in 6 months. But suppose nothing much happens in the next 2-3 months. This means that you are losing opportunity to make money in other stocks. Your capital is lying idle.

One must consider moving out, partly or completely, from such a stock if it remains inactive for a fairly long time. One could of course come back to the stock when the momentum returns.

Timely selling - with no compromise on capital protection - is the mantra that will bring success on the stock markets.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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