Investing is both exciting and quite a great experience you can have. It is your own journey towards your financial freedom. We were fully convinced to put our money into stocks because we believe that this is the best avenue we can grow our funds.
Although we heard a lot of success stories of people who have made it big, we have to also bear in mind the risks accompanied with it. That’s why experts are so proactive to tell everyone about risk-management. It is indeed very important! We always want to sell our stocks higher than the price we bought it but there are times that we need to sell it lower when something goes wrong.
1. When it’s already giving you sleepless nights.
We are just an emotional being and experiencing big losses is unhealthy anymore. After all, it is our hard-earned money. If it’s beginning to alter your health; mentally and psychologically, it is better to let go and not holding onto something that could lose your mind. I knew somebody who had a nervous breakdown just because of a ”gaming stock” which drastically went down overnight.
2. If you’re “averaging down” a penny stock.
Blue-chips are for long-term and penny stocks are for trading. Penny stocks are small companies which are not earning well but it can go up through speculation and big news. I observed what happened is that investors became instant traders hoping they can do trading without much knowledge about it and traders became investors when inflicted with heavy losses. The only option they can think of is to hold on to it and do averaging-down to lessen the cost & loss and be expectant that it might go up in the future. But when? We don’t know, maybe after 10 years.
I’m a swing trader and I see the importance of separating an investing account and a trading account. It is good to do averaging when it is not a penny stock. What I always do, I always set stop losses on any speculative and third-liner stocks. The use of Fibonacci retracement and Fibonacci extension are good tools to manage risk in trading.
3. When there are already warning signs.
If the company’s fundamentals (sales, debt, cash flow and so on) begin to show signs of stress, it may mean something has changed that will negatively affect the stock’s price. Don’t wait for the market to panic over a decline in revenue or another key fundamental, be prepared to unload the stock while you still have a healthy profit.
According to Investopedia, “…monitoring the performance of the underlying business is important. A key reason to sell is if the business fundamentals decline. In an ideal world, an investor will realize a deterioration in sales, profit margins, cash flow or other key operating fundamentals before the stock price starts to decline”. Poor earnings would eventually follow by shareholders selling their possessions.
4. When it is time to cut losses.
Cutting losses are the safest way investors and traders can do in managing the risks. Take, for example, I bought Double Dragon last 3 years ago at 8.58 pesos but I was able to sell it 65.21 since the stock is already on the sharp decline and also to secure my profit. It did go down even more to 38.65 but I was able to buy it again at 38.17.
Following a stop loss strategy is really something that we need to take seriously. My friend became so emotional when she had a loss of almost six digits by just not cutting losses. She doesn’t even know how to do it. Good thing I was able to have a chance to teach her basic technical analysis and risk management. Now, she was able to be confident on what she’s doing.
5. A better opportunity comes along.
Sometimes we get too attached with our stocks even both fundamental analysis and technical analysis are both saying it is already time to sell. Stock Market is a place of never-ending opportunities and letting go of a losing stock is the best way that we can do. Accept that you made a mistake and move on.