4 smart ways to handle your stock profit
Set a profit target
It does not mean that you have to sell your stock once the stock profit target is reached. But there is a psychological value in setting targets.
I find that setting a target helps me to ward off the temptation to sell my winning stock prematurely. Every time I look at my paper profits, I monetize it into benefits that I can get by using the profits.
The target helps me to refocus on my longer term investment goals.
Tons of research has shown that people who set targets do better in their particular field than those who don’t. If you have not been setting targets, start with your current stock holdings today.
Use a 3 to 1 risk reward ratioThat means if you are willing to risk 7% of your investment capital in a stock, your profit target must be at least a 21% return. If you are willing to risk 10%, your target return should be 30% or more for you to take the plunge.
You can be wrong 3 times in a row and still not get into financial trouble. A 25% gain using your remaining capital of $8044 will get you back to your original investment capital.
Do less to make more
Stop jumping in and out of your winning stock. Give your stock profits time to grow. When you have a winning stock, you would want to hang on to them for as much as you can and for as long as you can.
You will not expect a seed planted today to bloom next week. Likewise, stop putting in and taking out the seed to make it grow faster! Let nature work its wonder while you sit back and relax.
Use a trailing stop to protect your profit
Your stock has been rising for some time and you are sitting on a solid paper profit. Then for a few days it stops advancing and is now heading downwards instead.
You will not know for sure if the selling in your winning stock is a temporary correction or a real decline.
Set a limit as to how much profit you are willing to give up so that you can hold the stock through its decline. Remember, you want to ride a winning stock for as long as you can.
Let the behaviour of your stock decide when you should take profit. If it drops below your limit, take the money and run.
You may never sell at the exact top, so don’t get upset if your stock goes higher after you sell it.