Look also at zones of price support in the share price, the sector proxy and the market index for further evidence. If all three have exhibited strong historical support positions below your entry point, you lessen your risk. If, on the other hand, all three: the market index, the sector proxy and the share price do not have identifiable levels of price support below them, you are likely best to stay in cash or find another investment opportunity.
Value Investing: When to Cash Out
Markets are driven by supply and demand. Now throw in a healthy dose of the emotions of fear and greed. If the markets are liquid, there is not much an individual can do to substantially affect the supply or demand of a commodity or share price, but you can try to control your emotions to become a better investor.
As investors, we are inundated with endless advice about what to buy and when to buy it. A quick Google search of “buy shares” and another of “sell shares” shows a 6:1 ratio of web sites that use those terms. Although counting search engine hits is highly unscientific, it is an indication of where the emphasis lies in most on-line investment advice.
When to sell clearly needs more than 1/6th of your time and consideration. A few ideas:
• Plan an exit strategy before you enter the position, and then exit as originally planned
• Use a consistent strategy
• Keep a trading/investing diary – make sure you write down that exit strategy you are committed to in your diary.
Specific Exit Strategies Might be Based on:
• Achieving a target price or profit amount or percentage
• Monitoring the gap between the share price and the fair value – if the gap diminishes, you exit
• Placing trailing stop orders to protect profitable price levels as they are achieved
For long term investing it is best to leave a comfortable gap for your stop, otherwise you will stop out prematurely due to the inherent noise found in stock prices. Obviously, higher volatility stocks with wild price swings will need looser stops.
Financial brokerages are now adding new tools to their websites that empower their account holders with educational material and easy-to-use screening and trade idea generation tools. These new tools – due to their objective, consistent and reliable nature – boost investor trust and confidence. Educated and confident investors are better and more profitable investors.