Five steps to successful investing
If you want to make big money from your share portfolio, you need to know when to sell and bank your profits. Successful investors tend to stick to several, simple money-making rules. Use these too, and you should do well from your investments:
1. Recognise how the market works
This will help you can play the market successfully. Unfortunately, some new investors naively expect their shares to rise, and keep rising. The fact is: all shares go up and down at times. And, these novice investors often sell up at the first blip, and then see those shares start rising again. One should expect a two steps backward, three steps forward pattern to emerge with many shares.
Note: share investment generally involves patience. And, as a rough rule, the cheaper the share, the more patience is needed. Usually, you should invest for the long term.
2. Apply the ‘ten-day rule’
Then decide if you should hold on or sell your shares now. Some analysts become nervous when a share keeps
rising. And, they start describing it as ‘overbought’. Meaning that the stock is no longer worth the money it’s trading at and should be sold, because the price can’t go much higher. Similarly, when a share is spiralling down, it is described as ‘oversold’; and this suggests it is time to buy again, because it can’t fall much lower. Recommendation: add up the number of days the share has risen over the past ten days. Then deduct the number of days when it has slipped back. If you have a minus number, the share may be oversold, and worth buying. Or, if you have a plus number, it could be overbought, and worth selling.
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3. Consider selling just before the annual results
And, bank the healthiest profit then. It’s not uncommon for share values to rise on the back of impressive annual results – but then fall to a lower-than-normal level afterwards. Why? Many investors who want to sell, hold off to
obtain their dividends. But once the share becomes ex-dividend, these investors sell and the price fades. So, think about selling before the cuthave off date, even if it means forfeiting your dividend. This may be worthwhile if the dividend is nothing out-of-the-ordinary.
4. Watch to see when shares peak
And, decide if that’s the time to sell. Strategy: professional investors usually sell when a share drops 7% below its peak.
Hint: this strategy is most effective with slow, steady risers – as it suggests the share is now slowly and steadily falling. One must take caution though – if a share has made fast progress, it may well experience a similar, rapid fall. And it may be best to cash in at the moment it appears to have peaked, and slips a few cents. Otherwise, it
could go into freefall.
5. Set a stop-loss figure
And, minimise any losses on your investments. Fact: sometimes, certain shares are a bad buy – something
unexpected happens and values fall. Make sure that you always have a safety net in place – a stop-loss figure of 15% of the price you paid on smaller company shares and 20% for larger companies. This means that when a share falls to 15 or 20% of the price you paid, sell up – and write it off as a learning experience.