One of the most enduring sayings on Wall Street is "Cut your losses short and let your winners run." Sage advice, but many investors still appear to do the opposite, selling stocks after a small gain only to watch them head higher, or holding a stock with a small loss, only to see it lose even more.
No one will deliberately buy a stock that they believe will go down in price and be worth less than what they paid for it. However, buying stocks that drop in value is inherent to investing. The objective, therefore, is not to avoid losses but to minimize losses. Realizing a capital loss before it gets out of hand separates successful investors from the rest. In this article, we'll help you stand out from the crowd and show you how to identify when you should make your move.
KEY TAKEAWAYS
· Although stock market indexes typically move higher over longer periods of time, individual stocks don't always keep pace and many less successful ones can suffer long periods of losses.
· It is not uncommon for individual investors to hold losing stocks, expecting a turnaround, only to see it fall further still.
· In a worst-case scenario, the company goes bankrupt.
· Having a written plan will help you decide when and why a losing stock should be removed from the portfolio.
· Stop loss orders can be used to automatically exit a position and take a loss when a stock turns sour.
Remember: Sometimes, you need to make decisions that hurt your heart, but calm your soul.
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