Whenever we buy something and share price suddenly starts dropping, we (as a normal human behavior) could get little worried about why stock price is declining as our investment value is ultimately declining and we are in a loss.
Mistake we make in Stock Market!
Before investing money in any stock, we should always figure out why we are investing money in that particular stock?
Are we investing money just because the share price is rising every day and we want to be a part of that ride or we are investing for the Business value?
When we invest to ride the Rally!
More than 5000 companies are listed on stock exchanges. Out of them, many companies are actively traded. At every point of time, you can easily discover 1 or more companies that are witnessing a sharp and straight forward rise. Few stocks are always in a good momentum or going up.
If price of a stock is rising every day, it can easily attract a good number of people in it. These people would love to join the rally and be a part of the rally. But why?
Currently, stock has a good momentum and is going higher everyday. If we invest in the stock, we may be able to quickly earn some money!
That is a strategy of many investors and traders. If momentum in a stock is used wisely, it can help us to earn a good money from trading.
As i said earlier, before entering in any stock, it is important to pre decide why we are investing in that stock!
Investors who are investing in such momentum stocks in the hope of earning quick money initially able to enter easily. But when the trend reverses (happens many times), investors actually forget about why they took entry in the stock?
Instead of going up, if the stock price started dropping, it is important that we have a good exit plan to decide where and when we have to take exit from the stock. If the trend is reversed and selling pressure continued, stock price might see a significant decline from our entry point.
During this phase of decline, if we have no exit plan, we may continue to keep holding the shares in the hope that stock would again see a rise.
Another thing that may stop us from taking exit is this thought “What if share price suddenly starting rising from the point of our exit?”. This might come to our mind many times when we are thinking about exit.
At last, we could incur a big loss and the stock might also turn into our long term holding.
However initially, why we invested in that stock?
To benefit from the ongoing rally.
But when there are indications that the current postive trend is reversing in stock, it is important to take exit from the stock as we had taken entry just for trading purpose and to ride the rally. When the rally is no more, why to hold the stock?
Those who tries to ride the momentum stocks and earns money from this strategy usually have a good exit plan. Either, they follow stoploss (gives us an automatic exit if stock fell below our maximum risk price) or manual exit as soon as they realise that trend has reversed in the stock.
Stoploss can be set at any price. But we can place it near to that price upto which we are ready to take the risk in stock. Beyond the stoploss price, we are not ready for further downside risk and therefore, use of stoploss would give us an automatic exit if the stock hits our stoploss price.
When we are taking entry in any stock so that we could be a part of its rally and benefit from it, it is important to have an Exit plan in case the trend reversed in the stock. Don’t let that stock turn into your long term holding if stock price rally has ended. It is hard to book loss when the Loss is Big!
When we invest to be a Shareholder of Company!
When we are not investing money to ride the rally, then why we could be investing money in a stock?
To benefit from the growth in business or because share price seems low!
If we are investing due to any one reason, it is important that we give a proper and considerable time to our stock.
If we have bought the stock considering its Business Value or Low Share Price, it is important that we don’t get worried about short term volatility in the share price.
Don’t take exit from the stock just because it has not moved higher in recent time and has been an underperformer.
Have a longer view! Sometimes, a stock can take time to move. It will happen many times in share market that before going up, stocks will make you cry!
It will not be easy for you to predict when would your stock start going up. However, by giving considerable time to the stock, we can increase our possibility of remaining a shareholder in the company when the stock price would start going up. We can benefit from the rally or rise in stock price only if we are a shareholder of company during this phase.
Many investors invests in good businesses but take exit too soon because share price was not performing even after several days.
They would again search for those stocks which are linked with good businesses and again take early exit if the share price doesn’t performs within a few days.
We have to do this thing if we bought the shares just because we wanted to make some quick gains from the current rally but the price movement of stock is indicating that rally is nearly over or our stoploss has triggered.
When we have made investment considering its attractive share price or valuable business, it is important that we give a proper time to the stock.
So, that is the end of this article. To read this in extended version, you can checkout this link Avoid this Common Mistake in Stock Market.
Good Luck : )