Buy and Sell Rules from a Professional Investor
Every investor should start with a good solid set of buying and selling rules and stick to them. This will take the emotional involvement out of the process of stock trading. When the emotions of trading are out of the equation, a person can use rational and logical thought instead of the emotional thought. An example of the emotional thought is when a stock is trading poorly and you say to yourself “This stock will come back so I will hold on to it for a while longer”. This type of thinking leads to huge losses at times. But if you have a set of selling rules in place, you simply set a percentage amount you are willing to lose and sell the stock if it hits the number. Most professional traders will sell a new position if the trade turns bad and falls between two and eight percent. This type of rule will preserve your capital so that your remaining capital can be invested again to make up the loss on a later trade. Sell rules prevent the further deterioration of your capital. The loss of capital can be devastating for a person. A large loss requires a much larger gain later on to replace the lost capital. For instance, if you held a stock for a 50% loss you would need a 100% gain to counter the loss. So if a $50 stock falls to $25 before you sell, the only way to make the loss back is to buy a stock that must double in price. Capital preservation is one the major considerations of a professional investor. If your capital is not reduced you can continue to profit from new trades. Which leads us to some buy rules. Some buy rules to include in your investing strategy; Return of capital. How long will it take to have your initial investment returned to you so that it can be reinvested? Sophisticated professional investors want fast money. Money that moves and grows but is returned to the coffers quickly. Return on investment. How much will your invested capital return as a profit? This is important when determining which investment to choose when deciding where to place your money. If one investment offers an annual return of 10% and a second investment returns 20% annually, it is an easy decision. A smart investor will invest in the second choice. Future growth of a company. Is the business you are investing with growing, stagnant or shrinking? What is the outlook for trends in the industry? Are they positive? Is the company innovative? Initial value of investment. Is the stock at the right price? Is it expensive when compared to other stocks in the same industry with similar returns? Your opportunity to make profits in stocks is often decided by the initial cost of a stock. This doesn't mean the price of the stock. It is determined by the multiple of a stock when compared with other stocks. A $60 stock with a multiple of 15 is cheaper than a $20 stock with a multiple of 30. Save yourself a bunch of grief and take a small loss when necessary, keep your capital moving into investments with the best returns on investment and watch for growing companies to buy and finally, buy stocks which offer the best value. Matt Fox is a successful professional investor in stocks, options and commodities markets. He also invests in residential, industrial and commercial real estate markets. Read more investing tips from the author at http://www.bizmaker.blogspot.com. |
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