You’ll be Richer if You’re Not Greedy
An investing beginner’s mistake I made that you should learn from.
One of the very key aspects to trading in the stock market is that you must sell your stock in order to consider yourself to have made money. Until you exchange those stocks back into cash, all you have is a minute part of a company which usually isn’t all that useful or beneficial to you (but cash is, and we all want to get more of it). And in order to gain money though the stock market, we buy Stock A at a certain price point, and when at a higher price, we sell Stock A. The difference between that is what we earn. Some people choose to have a very long time period (read: years, potentially decades) between buying and selling if they believe that the company will keep growing, or some people choose to take advantage of market volatility and time the buying and selling so that they would be able to make a quick buck or two or hundred.
With the volatility in the market recently, I decided to go for the latter option with a relatively large company. I bought some of the stock after a small drop at $148 a share and after a particularly bad week for the markets coupled with a poor earnings report, I bought another round of the same stock at $140. Note: I ONLY bought more after such a big drop because I truly believed that it would recover quickly based on a mix of intuition, experience, and market patterns. Lo and behold, within a matter of 3 weeks, the stock was able to shoot back up, rising quickly to a price of $155 per share. If I took the average of my purchasing price ($144) and had sold all that I bought at $155, I would have made over $10 per share, which is rather impressive given the short amount of time and the risk I incurred with buying more at a lower price.
But here’s the kicker. I wanted more. I wanted a higher return and even though I would have been happy with selling it at $155 per share, I was greedy. So I waited. And the stock dropped a bit. And then recovered a tad, but then kept dropping and dropping. That very stock is currently worth $134, and I still haven’t sold it yet. Although technically I haven’t lost money yet, there were two things that I did lose — time, and therefore, opportunity cost. By choosing to stick with my stock in hopes that it would rise, I lost the opportunity to invest in other things that would allow me to gain money. Now, if I wanted to break even on my trade, I would have to wait until the next time the stock hits $144, which may take weeks, months, years, or maybe even never. If I wanted to post a profit, I would have to wait even longer.
When trading stocks, it is of utmost importance to set a firm limit and to sell at that price point. The loss of your time and the opportunity cost of not selling when you hit that deadline can oftentimes outweigh the potential reward of waiting and without a rigid sell point, the desire to make more money can ultimately be your downfall. It is only by selling that you make money and by setting that firm price point at which you are going to sell, you have a clear event that will trigger your selling, allowing you to realize your trade and capitalize on your time and money investment. Don’t allow the ideal of bigger and better returns to lure you into waiting longer and even if the stock does rise after you sell it, so what? You weren’t able to see the future and you still made money and that’s what counts.
So the next time you buy a stock to take advantage of the volatility, set a hard limit to sell at a certain price. Don’t let money blind you into thinking you can make more, and don’t let greed tell you that you can.