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FINANCE
Stocks-Mutual-Funds
How Do You React When Your Stocks Are Down
By Christopher Smith | On
January 5, 2007
| In
Stocks-Mutual Funds
|
When trading and dealing with the market, losses are
inevitable on occasion. It may be a bitter pill for
many to swallow but for those who are pros to the
game it is a pill that should be expected along the
way.
The buy and hold method of trading the stock market
has been preached to and from the choir loft. Yet it
is one thing to hear and know that this is a solid
investment tactic and another thing in which to
follow through when your stock has dropped 20 points
during the course of a single afternoon.
If you have experienced a bear market, you know how
difficult it is to stick with your original
investment strategy. Should you sell now and protect
your capital? Should you wait? Will it bounce? If
you sell now will it bounce? Should I sell half now?
Your emotions will often try and get the best of
you. A good trader will control their emotions, and
assess the current situation. What was the reason
for the drop? Was there news released? Has the
environment in which you are now trading in changed?
The buy and hold strategy requires discipline.
Nerves of steel are also helpful. Most investors who
risked more than they should will often head for the
hills, and often make bad investment decisions along
the way. Often, they will sell when they should have
held, or held when they should have sold. Gain
control of your emotions, and react accordingly.
If you have done your due diligence on your
investment before you bought, then you should be
able to weather the storm over the long term. As a
matter of fact, the drop may provide the perfect
opportunity to add to your position. Its important
to remember that the buy and hold strategy works
best with large cap stocks.
In these situations, perfectly stable companies may
begin selling for fractions of their actual value
for the interim-this by no means indicates that
these companies will not fully recover and prove to
be a perfectly solid investment. Below you will find
three fundamental truths that should help weather
your short-term market losses and stand fast when
others are running for higher ground.
First: what you hold in your portfolio is more than
a piece of paper; it is a part of a business. You
own a share in that business and as a result have a
stake in the prosperity of that particular business.
You will find that along the way many people simply
invest in stocks simply because they are going up
and hope to sell before they go down below the price
at which they were purchased. These types of
investors are more like 'gamblers' than investors
because they invest nothing solid into their
holdings. What goes up must come down and these
types of investors run a very real risk of loosing
money on these types of ventures.
In order to be truly successful as in investor you
must do two things. First, you must not let emotion
rule reason. Business and emotions are never a good
combination. This is no different when it comes to
investments in the stock market. Second, you must be
able to evaluate the business and the potential of
that business completely separately from the price
of the stock. Remember that even the best company in
the world is a lousy investment if you pay too much
for the privilege.
Focus On The Big Picture
Are you trading the stock market with the big
picture in mind? If you look at any chart over the
long term, you can easily identify areas where a
company has dipped, only to trade much higher a few
months later. In most businesses, there are seasonal
changes that affect the share price. If you are
trading with the big picture in mind, then you can
easily identify this as an opportunity to add to
your portfolio. When the company releases news, how
will it impact the company? Plenty of companies have
for example, sought financing by issuing shares.
Typically, this involves providing the buyer with
the shares at a discount to the current market
price. Not surprisingly, the share price drops to
that amount. This is usually where the traders bail
(hitting their stop losses on the way down).
However, if the company is a solid one, that is
going to use the money for expansion, acquisition or
debt repayment, the market will reward investors
over the long haul. If you sold based on one days
trading actions, you would be out of a position,
just when the company is poised to move higher.
Whether your are trading the stock market for the
short term or long term, the following tips should
help to improve your returns:
You won't win them all. When you do win and make a
20% return, you can still lose 3 times in a row with
a a 5% stop loss, and still come out ahead. Where
else can you go 1 for 4 and still come out ahead?
Yes, a 5% gain after 4 trades may not seem like
much, however, if you did that every month, you'd
have a total gain of 60% on the year.
Beware of tips. Usually by the time you hear about
it, the profit has already been made. Better to not
go to the party, than arrive when its time to turn
out the lights.
Under most circumstances, the higher the rate of
return, the higher the risk. Equities offer the
highest amount of risk, however offer the highest
amount of return. Cash offers the lowest amount of
risk and the lowest amount of return. This is the
trade off. During the last 50 years, equities have
averaged around 10-11% per year while cash has only
averaged around 4%.
Having a loss here and there in the stock market
should be expected. It isn't how you deal the gains
so much as how you deal with the losses you make
along the way. If your ultimate goal in life is
wealth then you are missing some of the greatest
value that this world has to offer in your pursuit
of that goal. Keep your investing goals realistic
and honorable-be prepared to take hits along with
the wins and learn to roll with the punches. That is
what separates a successful investor from a failure
as a person.
Want to become a better trader? Visit
http://www.1source4stocks.com today and start
improving your results.
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