Sunday, November 17, 2019

Handling Bad Trades in the Stock Market

         This post is a continuation of the $50 a month stock challenge I started October 14, 2019.  Click on, "No Commission Stock Trades", on the right side of the page to read from the start. 

     Inevitably you will have a stock trade the goes badly and you will have to decide when to sell at a loss (loss/gain only accrue when you sell a stock).  Every day price fluctuations are just "paper loss/gain".

     Since we do not put all our eggs in one basket (meaning all our money in one stock), we can wait and see if the stock price will recover. HP, that I just sold for a profit is a great example. After I purchased HP, it went down and gave me a "paper loss".  I simply waited for it to recover and sold at a profit (and captured the dividend).

     All dividend payouts (recorded when paid, not captured) and profits from the sale of stocks, makeup the total "gains". Any losses will be charged against those profits.

     You can actually sell a stock at a loss but still make money if the dividend payout is larger than the loss. Buy a stock for $40.00, capture the dividend of $0.60, and sell the stock for $39.75.

     You had a loss of $0.25 on the stock but a $0.60 dividend for net gain of $0.35. That is not always the case and "buying" stocks you are willing to keep for awhile is important.

    An example is IVZ that I purchased to capture the $0.31 (quarterly) dividend. The stock closed @ $17.45 on Friday. That is down $0.45 from my purchase price of $18.00, even with my $0.31 dividend I am still at a loss.

     If I hold the stock for another 90 days (a quarter), I will receive another dividend of $0.31. Even if the stock does not recover, I will have made $0.31 x 2 = $0.62. I could now sell at a loss and still make a profit.

     Other times it my be prudent to just sell at a loss and charge it against your profits. The proceeds from the sale might be do better if invested in another stock. However, a loss is a loss and should not be taken lightly.

     When you set realistic goals (ours is 2% a month or 24% yearly), selling at a loss (charge offs) is acceptable if we maintain our goals.

     2% a month does not mean 2% EVERY month but the accumulative average. I great percentage monthly gain might be the proper time to unload a stock you know longer believe in.

     Purging your portfolio of bad performing stocks when possible will keep your portfolio healthy.

     "Wait for Recovery", "Sell at a Loss"...… seems I am talking out of both sides of my mouth. Any one can makes money "buying low/selling high", knowing when to cut your losses is the hard part.

     At least buying dividend paying stocks (not the only stocks I buy), you get paid to wait.

Disclaimer, I am not a professional.


Anonymous said...

I like your strategy.

squire said...

Thank you, I think it is a very good strategy for the beginner (or advanced) trade.


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