Lessons On Selling Stocks

How to Sell Stocks to Maximize your Profits


Buying a stock is only half of your journey to building your wealth. Knowing when to sell is just as important. The first lesson of this course discusses why it's critical to cut your losses early. The second and third lessons teach you how to spot the best time to sell and take your profits.

These lessons are based on decades of research into the primary factors that move stocks. These principles aren't based on someone's opinion or theories from business schools. They're all based on what actually works in the market.

Lesson 1. Cutting Losses

Success in the stock market is as much about limiting losses as it is about riding winning stocks. A rule-based and disciplined selling strategy can help you avoid heavy losses and preserve your portfolio value. This lesson explains how to sell when a stock does not perform as per your expectations.

Nobody's right all the time in the market, not even veteran market professionals. But as the famous investor Bernard Baruch once said, "Even being right three or four times out of 10 should yield a person a fortune if they have the sense to cut losses quickly."

If your stock selection doesn't work out and you're faced with a loss, sell to limit your losses; act quickly.

Being a successful investor is just as much about limiting losses as it is about riding a winning stock. Downturns are a part of life in the market, and you must act decisively to protect yourself from excessive losses. If your stock selection doesn't work out and you're faced with a loss, don't let your pride stop you from admitting you've made a mistake and acting quickly. Cut your losses early and move on. You must make rational decisions instead of trying to rationalize your way out of a costly mistake.

The first rule is sell any stock that falls 8% below your purchase price. Why 8%? The first rule is - sell any stock that falls 8% below your purchase price. Why 8%? Because research confirms that stocks with all the right fundamental and technical factors and bought at the proper buy point rarely will fall by 8%. If they do, there's something wrong with them.

Sell the stock if it falls 8% below your purchase price. For example
Your purchase price per share Rs. 100
The stock price falls to Rs. 92 or lower [8% fall from your purchase price of Rs. 100]
Your decision should be SELL
Make no exceptions to the rule.

You may think a stock is due to rebound. But the market could send the stock to lower depths regardless of your views or what analysts and commentators say on TV. No excuses, no alibis. You may want to sell even before an 8% loss if you see other signs of weakness in a stock.

This rule emphasizes the importance of buying at the right time. If you don't and you buy a stock that is overextended (that's reaching the end of its climb), chances are it will hit the 8% sell level as it goes through a normal pullback. Make no exceptions to the rule. The best stocks will always give you other opportunities to buy. Here's another way to look at it: Once a stock falls 8% below your cost, does it still look attractive? Is it still among the best stocks? Probably not. There's no guarantee that it will go back up, and you need to protect yourself.

The bigger the fall, the harder it is to recover. Say you bought a stock at Rs.100 a share. It falls 20%, to $80. To get back to Rs.100, the stock has to make a 25% gain. Another example: The stock plummets 50%, to Rs.50 a share. It would take a 100% jump to get it back to Rs.100 - and how often do you buy a stock that doubles? And if it does, how many weeks, months or even years does it take to get there? Wouldn't you rather cut your loss early, and free up money to purchase another stock with better chances of doubling?

Of course, it could happen that you sell a stock that falls 8%, and then watch it go up afterward. But you have to think of the 8% sell rule as your insurance policy against catastrophic losses. The rule will in effect limit any losses on your portfolio to no worse than 8%.

Nevertheless, if you've bought a fundamentally sound stock at the right point, (explained in the stock buying lessons) it will rarely plunge 8% immediately. Buying exactly right will solve half your selling questions.

Stock Shares Cost/Share Sell Price Profit/Loss %Profit/Loss
A 100 Rs.50 Rs.46 -Rs.400 -8%
B 100 Rs.50 Rs.46 -Rs.400 -8%
C 100 Rs.50 Rs.60 Rs.1,000 +20%
D 100 Rs.50 Rs.46 -Rs.400 -8%
E 100 Rs.50 Rs.46 -Rs.400 -8%
F 100 Rs.50 Rs.46 -Rs.400 -8%
G 100 Rs.50 Rs.75 Rs.2500 +50%
  Total Rs.1,500      

As you can see, even if you had made these seven trades over a period of time - and taken losses on five of them - you would still come out ahead by Rs.1,500. That's because the two stocks that worked out resulted in a combined profit of Rs.3,500. And the five losses - all capped at 8% - added up to Rs.2,000.

You see the point? It would take several 8% losses to wipe out the profit from just one or two good stocks.

The 8% sell rule, however, applies only to drops below your purchase price and does not apply to situations where you've already made gains on a stock.

About 40% of stocks pull back close to their buy point for one or two days. This is not the time to panic and sell, especially if the stock was purchased as it came out of a sound basing area at the right buy point. (For more on this, check lessons on charts ) As long as the price doesn't drop 8% below the point at which you bought, you should, in most cases, hang on through the first pullback.

Watch how the stock performs relative to the general market and its industry group peers. Often, a stock pulls back close to the buy point for one or two days because the general market has temporarily pulled back. This is normal. On the other hand, if the market has been rallying over several days and your stock hasn't come to life, then this might be a warning sign, even if the stock hasn't dropped 8% below your purchase price.

“Sell if the stock falls to 8% below my purchase price,” Anand tells his stock broker – example of a stop loss order.

Some investors like to use stop-loss orders, which are instructions to brokers to sell a stock at a predetermined price. This might be useful for those who can't watch their stocks closely or for those of us who may be less decisive.

Tax considerations and brokerage charges should not be given importance in your sell decisions. You shouldn't always hold a stock for more than a year just to avoid paying tax on the profit. And with lower brokerage charges today, they should not be the most important factor. Your main goal should be to make and retain profits.

You may notice that your portfolio includes some stocks that are already 8% below your purchase price — or worse. Should you sell them? Probably yes because as the stock goes lower, it becomes even more difficult to sell. It is easier to sell a stock which is down 8% to a stock which is down 30%. You feel that the stock cannot go lower but feeling has no significance in the stock market. There is no guarantee it will rebound and the chances are it could go even lower. The greater the loss, the greater the chance of it developing into a really serious loss.

  • The first sell rule is to get rid of any stock that falls 8% below your purchase price.
  • It's critical to follow this loss-cutting rule regardless of how highly you value a stock. Personal opinions get in the way of smart selling decisions.
  • The larger the loss, the higher the recovery you need to get back to the break-even level. (A 50% loss requires a 100% gain to break even.)
  • Strong stocks sometimes initially retreat close to their buy point (as determined by the stock's chart pattern). This doesn't necessarily mean you have to sell, unless the stock goes 8% below the purchase price.
  • Avoid making sell decisions based on tax concerns or commission rates.

Leave a comment

15 Comments


FEROZ KALWACHWALLA
Sep 04, 2018 at 02:19 Reply

8% STOP LOSS MAY BE POSSIBLE TO IMPLEMENT IF YOU BUY STOCKS IN ONE TRANSACTIONS. THIS IS NOT POSSIBLE WHEN SERIES OF BUY AND SELL TRANSACTIONS HAPPEN AND WE LAND UP WITH AVERAGE PURCHASE PRICE. HOW DO WE HANDLE SUCH A SITUATION? WE CANNOT OPERATE INDIVIDUAL TRANSACTION WISE.


Team StockAxis
Sep 11, 2018 at 11:20

Dear FEROZ KALWACHWALLA,

We recommend you to enter the stock after taking into consideration all the fundamentals and financial ratios of the stock.

Even if you have bought a fundamentally good stock and that it has corrected by 8% or more than holding period matter more. If your planning to hold the stock for a long-term than 8% rule need not be followed and that you should average(if you wish to) only when the trend of that stock reverses to up-trend.

If you planning short-term holding than 8% rule can be followed ( 8% rule is risk appetite that is recommended to retail investors)

Regards,
Team Stockaxis


Haridas S
Aug 25, 2018 at 08:34 Reply

Good and informative points for beginners like us.


Team StockAxis
Aug 30, 2018 at 10:50

Dear Haridas S,

Thank you for visiting us and believing in us!

We recommend you to also read the following blogs.

Using the EV/EBITDA multiple smartly!

Use The P/E Ratio Smartly!

Regards,
Team Stockaxis


Sanjay Tiwary
Aug 21, 2018 at 08:50 Reply

Dear sir, Your effort to enlighten your subscribers deserves a great praise. Thank you very much for your initiatives to educate us. I failed to really understand Buy Point. Will you please guide me that how to do analysis of any stock's chat pattern . Is it normally done by short term traders? Thanks and regards Sanjay Kumar Tiwary


Team StockAxis
Sep 11, 2018 at 11:33

Dear Sanjay Tiwary,

We apologize for the delay in response.

The questions that you have raised are very subjective and we recommend you to talk to our analyst to get a view on them.

We have directed your assigned Relationship manager to talk to you and provide resolution with the above-mentioned questions.

Regards,
Team Stockaxis


Gautam
Aug 19, 2018 at 04:58 Reply

Very useful n informative.


Team StockAxis
Aug 20, 2018 at 05:38

Dear Gautam ,

Your welcome Sir.

We recommend you to also read the following blogs.

StockAxis Market Intelligence (Commentary for July 2018; Outlook for August 2018)


Regards,
Team Stockaxis


OP verma
Aug 19, 2018 at 10:22 Reply

Liked the contents especially about sentiments and feeling. Just should stick to this rule. I had been making losses like this.Even made losses on good stocks like SUN Pharma because I did not sell after it peaked out. Just kept holding. It is now recovering and yet to wipe out old losses. Thanks for the good lesson. I missed all your buying lessons. Hope to read these.


Team StockAxis
Aug 22, 2018 at 04:11

Dear OP verma,

Welcome, Sir. We are happy that we could provide you with insights to make better-informed decisions in the future.

We recommend you to also read the following blogs.

Using the Debt-Equity Ratio Smartly!

StockAxis Market Intelligence (Commentary for July 2018; Outlook for August 2018)


Regards,
Team Stockaxis


PRAHLAD NAIK
Aug 19, 2018 at 09:23 Reply

THANKS FOR STOP LOSS INDICATION OF 8% PERCENT. Same I would like to know to put STOP LOSS in index option


Team StockAxis
Aug 22, 2018 at 04:14

Dear PRAHLAD NAIK ,

Stop loss is basically an investors risk appetite. 8% rule should be followed by retail investors in order to minimize their losses. We recommend you to please device strategy in options rather than looking for stop loss.

Regards,
Team Stockaxis


pradip wankar
Aug 18, 2018 at 09:40 Reply

Thanks for your useful info . if one has to invest for long term , how many years


Team StockAxis
Aug 20, 2018 at 04:37

Dear pradip wankar,

We recommend you to plan a long-term investment portfolio. However, it depends on your capital too. If your corpus is above 10 lakhs then you can plan to even invest for short term but not very short term. If your corpus is around/above 5 lakhs than we recommend you to invest for long-term as that will minimize risk to your portfolio and provide you substantial gains over the period of time.

You can choose between Multi-bagger or Vission 10X services as these will provide you growth with minimum risk.

We have asked your assigned Relationship Manager also to help you plan better.

Regards,
Team Stockaxis


Amitava
Aug 18, 2018 at 09:30 Reply

The lesson is much helpful for me a small retail investor. However a few large cap stocks e.g. TaTa Motor, Coal India etc recently vacillating beyond 52 weeks low or above proving inconsistent performer though giving sound dividend. Are you think Rule 8% would be applicable?


Team StockAxis
Aug 24, 2018 at 11:28

Dear Amitava ,

The 8% rule applies to a short-term trader and not for long-term trade.

Tata Motors is a reeling under severe debt pressure and issues related to loss-making Indian operations and not being able to get a big chunk of passenger car market. Thus investment in Tata motors at this moment seems a very risky investment decision.

Coal India through a very strong company fundamentally has seen a huge rise in employ cost, from approximately Rs. 30,000 crores to approximately Rs. 42,000 crores. Also, it has not been able to supply coal to power plants at optimum levels.

Considering 8% rule, the more important factor is the fundamentals of the company and not just the rule itself. If a short-term trader has invested in the company without looking at its fundamentals than 8% rule should be applied. 8% rule also signifies investment risk appetite of an individual, which can be more from person to person.

Regards,
Team Stockaxis


P.K.SHEWALE
Aug 18, 2018 at 07:48 Reply

thanks


Team StockAxis
Aug 20, 2018 at 04:28

Dear P.K.SHEWALE,

Your most welcome Sir.

We recommend you to also read the following blogs.

Use The P/E Ratio Smartly!

StockAxis Market Intelligence (Commentary for July 2018; Outlook for August 2018)


Regards,
Team Stockaxis


Aritra Sarkar
Aug 18, 2018 at 05:06 Reply

Nice information and we'll written.


Team StockAxis
Aug 20, 2018 at 04:27

Dear Aritra Sarkar,

Thank you for appreciation Sir.

We recommend you to also read the following blogs.

Using the Debt-Equity Ratio Smartly!

StockAxis Market Intelligence (Commentary for July 2018; Outlook for August 2018)


Regards,
Team Stockaxis


Joginder kumar
Aug 18, 2018 at 04:16 Reply

Sir please lesson Hindi mein do


Team StockAxis
Aug 20, 2018 at 04:26

Dear Joginder kumar ,

We have taken your feedback, Sir.

We will try to introduce lessons in Hindi too.

Regards,
Team Stockaxis


ARVIND RAJE
Aug 18, 2018 at 02:22 Reply

Good lesson. Makes it clear as to what is expected in the market.


Team StockAxis
Aug 20, 2018 at 10:36

Dear ARVIND RAJE,

Thank you, Sir. We are happy that our lessons helped gauge market pattern.

We recommend you to also read the following blogs.

Using the Debt-Equity Ratio Smartly!

StockAxis Market Intelligence (Commentary for July 2018; Outlook for August 2018)


Regards,
Team Stockaxis


MOSUMALI PIRJADE
Aug 18, 2018 at 08:49 Reply

Dear Sir I am impressed due to Ur literacy about market. Please r u clearify which analysis better technically or fundamentally for success


Team StockAxis
Aug 18, 2018 at 11:06

Dear MOSUMALI PIRJADE,

Thank you for visiting us and believing in us!

We recommend you to invest in long-term as the value creation is the best strategy to multiply wealth.

We recommend you to also read the following blogs.

StockAxis Market Intelligence

Has the Recent Correction Made Valuations Attractive?


Regards,
Team Stockaxis


MUKUT BEHARI AGRAWAL
Aug 12, 2018 at 09:02 Reply

A very useful lesson. Thanks for educating.


Team StockAxis
Aug 13, 2018 at 04:00

Dear MUKUT BEHARI AGRAWAL ,

Thank you for visiting us and believing in us!

We recommend you to also read the following blogs.

Use The P/E Ratio Smartly!



Regards,
Team Stockaxis


chandan kumar jain
Jul 29, 2018 at 06:42 Reply

Your efforts to teach investors through these lessons are appreciable and good for me as a small investor.


Team StockAxis
Jul 30, 2018 at 11:01

Dear chandan kumar jain,

We really appreciate your kind words, Sir. This helps us to keep doing better.

We recommend you to also read the following blogs.

StockAxis Market Intelligence

Has the Recent Correction Made Valuations Attractive?

Regards,
Team Stockaxis