Stock Investing Guide: Know When to Fold 'Em

Think of this article, which will discuss how to sell stocks in the market, as part of your stock investing guide. In this context, "knowing when to fold 'em" most obviously connotes selling stocks when they are not performing well. However, investors need to know when to sell their stocks not only when they are performing badly but also when they are performing well.

Knowing when to sell is one of the fundamental parts of sound investing. The major factors involved in selling stocks are the commission costs, the amount of liquidity and the investment rules that are being implemented.

Commissions

Chances are, as an investor, you have a commission rate of no more than $20 per transaction. Obviously, if you are an active trader and partake in a high volume of trading and investing, the commissions go lower. The lower the commissions are, the better able you are to sell stock.

Liquidity

Selling should be done during high liquidity. Liquidity refers to the amount of buyers and sellers for the stock. In almost all circumstances, it is best to sell the stock at a profit when the stock is liquid and reaching new highs. These could be new highs for the day or the week or new all-time highs. As a trading premise, it is not keen, but as an investment rule, it is a great idea to sell a stock at a profit when the stock is reaching all-time highs.

Investment Rules

Make sure you remember that, as an investment rule, you should not have more than 10 percent of your total investment capital in one position if this is to be traded on a short-term basis--in other words, if the time horizon for the holding period is less than a year. Another rule to remember is that a stock should be sold when it loses 10 percent of its value. According to major investor Bill O'Neil, hugely winning stocks never lose very much from any point of initiation of the investment. That's why they are such winning stocks. If you choose wisely and are patient, you can implement this strict selling rule. Keep in mind that the threshold for the percentage of loss can vary. In times of high volatility, you may deem a 10 percent loss too strict. During times of low volatility, it's better to apply a stricter rule of allowing no more than a 7 percent loss.

Understand that this selling rule almost always applies to fresh new bull cycles. Therefore, if you can identify a new bull cycle and can pick a high growth stock that is expected to become a major household name, then this selling rule is almost necessary to be successful with the given failure rate.

Cash Reserves

Finally, learning from commodities and futures traders, one should have roughly no more than ten positions and cash reserves. Cash reserves will allow liquidation of positions while affording other opportunities.

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