Have exit strategy when going fishing in volatile bourses

Investors buy stocks that are soaring in anticipation of further gains. FILE 

By ISAIAH OPIYO
 

 

Whether you are investing in the bourse for speculation or for the long-term, the main aim of buying stocks is to sell for a profit.

While you are holding on to your shares, you can enjoy the dividend paid out by the company whose shares you have invested in.

As an investor, sometimes you need to make snap decisions. Should you buy, sell or hold that stock? You won’t always have time to consult analysts. So what do you do?  

Many retirees who have invested their hard-earned savings in the stock exchange often face this dilemma whenever they are in need of alternative income for their upkeep.  Because they cannot work any more, they resort to liquidating their portfolio for money to meet their daily needs. 

Most investments in the stock exchange are made to complement financial plans for capital growth and later liquidated to support this goal.

As the prices of the stocks improve or increase, the investor reaps on the amount invested. But due to the volatility of stock prices, the benefits of capital growth is only enjoyed at the exit prices. These prices can fall suddenly to erode the growth on capital before the investor is able to sell.

This usually raises a common question from investors: For how long should one hold on to their shares as their financial plans continue to delay?

Buying stocks is an easy task that does not require expertise. Anybody can get to the bourse and buy shares. But the challenge is knowing when to sell. Investors often end up making costly mistakes by selling too soon or incur huge losses by holding on to a falling stock only to sell below the buying price.

Volatility is here to stay and investors have to get used to it. The less aggressive buyer is shaken by the market turbulence and abandons it for the more stable investments. 

There are no reliable clouds to tell when a rising stock has reached its peak price. Ordinary investors are therefore often ruled by emotions as they ponder whether to hang on to their stocks hoping for better tidings or sell their portfolio to cut their losses.

While you’ll never be able to sell at the peak price each and every time you invest or even be sure that you are buy buying a stock that will subsequently fall dramatically, the secret is to plan your exit before putting your money there.

An exit strategy determines the lowest price you should sell your stocks at if the tide turns against you and the highest price at which you can exit to profit from your investment. Each of these strategies aim at achieving two things—stopping a loss or making a gain.

To successfully plan your exit and minimise your losses, you need to take the following steps.

First, you should formulate your entry and exit strategy which should be in tandem with your investment goals especially in terms of how much returns or capital you desire to make and the minimum loss you can tolerate if the market waves go against you.

This requires thorough research on the companies you would want to invest in to determine their financial performance, the quality of their management, the trend of their price fluctuations and their outlook

 

You should then decide the length of time you want to invest in the bourse before you liquidate your stocks. People who are risk averse need an exit strategy that would stop loss as quickly as possible. But high risk takers would require an exit strategy with a longer timeframe that allows prices to bounce back   

An exit plan is crucial since it guides you and stops emotions getting in the way of investment decisions.


Setting a profit point and a loss point allows you to look at trading logically rather than an emotionally.

Investors buy stocks that are soaring upwards in anticipation of further gains. But the key is buying low and selling high. Also sell to prevent further loss by disposing of stock when it drops by a certain percentage. This enables you to exit with minimal loss rather than enduring heavy loss.

Mr Opiyo is training manager and coach.