The stock market is a volatile place where you have to take risks and calculate your rewards accordingly.
Would you choose a 100% chance of losing Rs. 90,000 or would you choose a 90% chance of losing Rs. 100,000?
Many people will choose the second because there is a slim chance of not losing, in this case people will prefer this risk rather than the risk of losing it all. But on closer look, you will realize that the quantum of loss is same in both the scenarios.
Similarly, in the stock market, you will have to be very careful in identifying the real risks and cut losses when the risk seems to be too much. You have to calculate the losses logically and not on face value.
No investor buys a stock deliberately to see it sink lower and lower, but due to the stock market’s erratic behavior, sometimes stocks dip down and that is the inherent nature of investing. Your objective is to minimize losses rather than avoiding it. Don’t be afraid to take risks, but cut it loose before it drags you down. The fact of realizing capital loss before it is out of control, is what separates the experts from the rest.
Investors tend to hold stocks even when they see it is losing in value, why?
Stocks Always Bounce Back
The fact that investors know that the stock market will go higher after a crash, is what makes then believe that their losing stocks will bounce back as well. The reason for drawing such a conclusion is reading any past stock index chart where the line moves from the lower left to the upper right. Truth is, higher indexes are populated by the winning stocks. Losing stocks are replaced by more successful stocks.
Investors tend to lose interest in their stocks that keep losing over a long period of time. As a result their well-maintained portfolios start showing signs of decay and neglect. Investors often have a tough time weeding out the losers, they hold on to hope and do nothing. In the end the losses grow out of control.
Realize Capital Losses
Hope is not a strategy. Sometimes you will have to sell your losing stock before it becomes a major nuisance. Rather being emotional about it, you should be logical to cut your losses free before they start eating into your profits.
How do you make sure a small loss doesn’t start eating your profits? Simple enough,
Have A Strategy
Always have an investment strategy and follow the rules for buying and selling. Discipline is of the utmost importance when it comes to the stock market.
Reasons for Selling
Just like you had a reason for buying, you should have a reason for selling as well. Reasons can be anything from general news that might affect your stock to cutting losses.
Set Stop Losses
Always set a stop-loss on your shares so that you can sell them and limit your losses. The stop loss will prevent you from incurring further loss.
This strategy is used to realize your capital losses and provides you with the required discipline against holding losing shares. You receive tax credits that you can use to offset taxes on your capital gains, so remember that.
It is all about prevention, rather than cure. Take corrective action before your losing stocks drag you down.