There are two critical decisions every investor needs to make with his equity investments – first, when to sell and second, when to continue holding the stock. Selling too soon is one of the most common mistakes investors make. Holding a losing stock is the other mistake. Let’s discuss these two aspects of equity investing.
You shouldn’t continue to follow a stock up by raising stop-loss orders because you will be forced to sell near the low of an inevitable, natural correction. Once your stock is 15% or more above your purchase price, you can begin to concentrate on the price where or under what rules you will sell it on the way up to nail down your profit.
Any stock that rises close to 20% should never be allowed to drop back into the loss column. If you buy a stock at Rs 50 and it shoots up to Rs 60 (+20%) or more, even if you don’t take the profit when you have it, there’s no intelligent reason to ever let the stock drop all the way back to Rs 50 or below and create a loss.
If you’ve already made the mistake of not taking your profit, avoid making a second mistake by letting it develop into a loss. Remember, one important objective is to keep all your losses as small as possible.