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.
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.
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