Minimize Your Stock Losses

Many investors commit the common mistake of holding a stock that is losing its value. They justify their action by stating that they haven't lost any money since they haven't sold the stock. However, they don't realize that it is better to minimize the losses now until they haven't turned into greater losses later.

In this way they commit two mistakes. First, they have purchased a losing stock. Second, they take a risk by keeping the losing stock and not fixing the problem until it is not too late.

The optimistic feeling that the price will eventually rise again obscures the sound judgment of most investors. They think that the price was once high, so it will be high again some day. But is it worth waiting for that day?

Being an optimist in your daily life is a good thing. However, in the stock world reason is what should guide your decisions.

Consider the following example.

John has purchased stocks for $20,000. Unfortunately, the market suffers some major crisis, which eats his investment to the miserable $10,000. He sustains a fifty-percent loss. However, his optimism makes him think that the prices will rise and he will return his investment to the previous levels.

But what are John's chances?

Unfortunately, there is a little probability for John to return his investment to the previous levels if he waits for the market to do the job instead of him. In reality, a 100% increase in the stock prices is needed so that John's current $10,000 returns to the initial $20,000.

It is not absolutely impossible to happen. However time is needed and the luck that John has bet on the right stocks.

Final Piece of Advice

We would like to recommend you to try to minimize your losses when such occur. Don't risk losing everything by letting your overoptimistic expectations cloud your reason.

The key to making money in the stock exchange is not to lose it.

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For knowledge we can highly recommend you subscribe to the The Wall Street Journal.

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