Stock Market Exit Strategy
The stock market is a great place to make money because it often gives better returns than what most people earn from other sources. However for any chance of success in the stock market, you will have to know how to protect your profits. And thus, even when you are putting your money in a stock, you must have an exit strategy ready.
What Is The Exit Strategy?
Exit strategy is the plan you use to determine the time when you should sell the stock to realize your money. Now this strategy can be implemented both when you are making a profit and when you are suffering a loss. Let us understand this better with the help of two scenarios.
Scenario 1: You have purchased a stock at a price and sometime later (which can be weeks, months or even on that same day), its price goes up by say 10% or 15%. At this juncture, you need to decide whether the time is right for you to sell off or not. Very often, investors are unable to decide what is the best time to sell, particularly when the price is going up because they wrongfully assume that it may keep going up for some more time. But the fact is that, there is a resistance level beyond which the stock’s price does not escalate, or worse still, it starts to fall.
Scenario 2: This is just the opposite of the first scenario. You purchased the stock at a price, but sometime later you find that its price has fallen and thus you have to dispose it off. Now here too there are many investors who make the mistake of holding back because they do not want to suffer a loss. They hope that the price may go up to at least the purchase point so that the loss can be recovered. But often this does not happen and the stock keeps plummeting, thus increasing the loss.
Not having an exit strategy would mean that you will be unable to decide the best time to sell. When this happens, you cannot get the best returns on your investment.
Exit Strategy Help
You can get help from several sources to form your strategy such as market indicators, trailing stops, moving averages, resistance areas, trend lines and others. Plus, there are market tips too.
Using a combination of all this can help you determine the best time to sell the stock.
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It’s probably best to never sell ALL of your stock at once, if it us only up 10%. You should never BUY all of your stock at once but instead average in over a period of time. Selling on runs and reinvesting dividends is a graet way to take profits and average in more as well. Averagin is crucial if you are investing in small cap stocks because they are so volatile and your investment can be down 20% in a few days after taking your initial stake. I use the research at microcapreports to choose when and where I should average in.