How To Protect Your Investment
Capital?
by
David Chew
What do
you expect when you buy a stock? We expect
the stock price to go up so that we can sell at
higher price than we originally bought them and take
the profits. But many times things turn out not as we
planned. What happens if the stock price does not go
up but instead go down? It goes down 5%, 10%,
15%...50%.... If you don't cut you losses, you will
lose your hard-earned money.
You may
face financial difficulty if you buy stocks on
margin. This is the actual situation during the last
few years when NASDAQ plunged from the peak of 5000+
points to 1000+ points. Imagine if you put your stop
losses in place, normally about 10%, you are out of
the wood and just lost 10% of your money.
Nobody wants to
sell a stock at a loss; it is a loser feeling. I have
the same feeling many years back. I bought the stock
at $18.00 and you ask me to sell at $16.20, no way!
Yes, this is exactly what most investor would
respond.
When stock
market crashes and if you don't stop loss at $16.20,
you will be watching your stock plunging from $16.20
to $12.00, to $8.00, to $4.50 and 40 cents. This is
why so many investors lose money, houses and cars. By
applying this simple rule of cutting your losses, you
can protect your capital from further shrinking.
This sounds
simple but it works ALL THE TIME! Stop loss is
not only a rule. It is a stock market principle. Do
you know that there are only two types of investor in
the market, the donor and the collector? Which type
are you? Do you want to join in the collector group?
If the answer is yes, don't act emotionally, and
apply the stop loss rule!
It is not easy
to be the collectors. Even the fund managers are not
able to be collectors. Sometimes they are donors in a
big way. Do you think fund managers out there really
make money for you? Their job is just to beat the
index. If the index drops 30% and their funds drop by
25%, then they consider themselves as heroes. For
fund managers, there are many rules and regulations
that restrict them from cutting losses. But as an
individual investor, you can.
Stop loss is
just like buying house fire insurance. You pay a
small premium to protect your house (capital). You
will get paid in full amount if your house is burned
down (Market Crash). Similarly in stock market, you
just pay small premium (10%) to protect your 90%
capital. Protect your capital and you can come back
any time. There are so many good stocks and so many
opportunities out there.
As a
successful investor, you should not have emotion with
your stock. They are just business products
helping you making money. Don't fall in love with
them. When time comes to cut loss, just sell them off
without emotion.
Many investors
lose money in the market because they don't want to
sell their favorite stocks. They think the stock
price will bounce back eventually. If you let your
stock goes down 50%, you will need the stock to climb
back 100% just to breakeven. How often stocks double
in price??? Yes, sometimes the stock price will come
back, but most of the times the stock price never
rebound. Yes, I mean never. So, why take the risk
betting and hoping the stock price will come back.
Just take a small loss and move on to other stocks.
____________________________
About The
Author
David Chew
is a professional marketer and has been helping
others to succeed in home business since 2002. You
may subscribe to his Weekly Quick-Retirement Tips at www.quick-retirement.com
David is
also a veteran stock and option trader. He is the
Author of 'Stock Market Survival Kit - The 8
Golden Rules'. Check out the website http://StockMarketSurvivalKit.com
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