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Stocks - Protection in Bear Market
Author: D Dave
Ideally, before you invest in any financial endeavor, you should always have an exit strategy to account for any unforeseen circumstances. Stocks are no exception.
Buying stocks is not a big deal. Most of us have access to financial TV channels and Internet and it has become very easy for an ordinary person to open an account with an online broker and start buying stocks. The hard part is knowing when to sell these stocks.
Let us take a hypothetical situation here. Lets say you bought Microsoft stock at 20 $ per share three months ago. You have a full time job and a family to look after. You hardly have any time left to follow up with your portfolio on a consistent basis. Your stock is currently trading at $44 and you don’t want to lose your initial principal and your profit. At the same time, you don’t want to sell now because you don’t know how far the stock will go up. What do you do in this situation?
Every online broker nowadays provides trailing stop strategy to sell off your stocks. Basically, this strategy will instruct your broker to sell off your stocks if they fall down by a predetermined percentage. I usually take this predetermined percentage value to be 25.
So, in our example above, if the current quote of Microsoft stock is 44 $, 25% of this quote is 11. That means, no matter what happens, if your stock falls down 33$ (44 – 11), you will sell your stocks and still possibly make a profit as long as it hasn’t fallen down below your initial investment.
The only disadvantage I can think of in trailing stop strategy is that if the market is very volatile and the value of the stock temporarily comes down below the value of the initial investment, your trailing stop strategy will not know that the market will rally back and you will have sold your stocks at a loss.
Divyesh Dave is a part time entrepreneur and maintains an active interest in Finance. For more information, visit http://www.bajika.com . He also runs a financial blog at http://ezdough.blogspot.com/ .PENDTAG ...
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