It takes a lot of research in order to buy winning shares, but the real skill when learning how to play the stock market is knowing the best time for selling shares.
In an ideal world, it would be possible to learn when the price of shares would peak before dropping again. However, many experts would agree that the best traders aren't bothered hitting the absolute peak of a price rise. The best traders ride the middle of a wave to ensure the get out before it ends.
When to sell shares
The number one tip for selling shares at the right time is not to let emotion affect your decisions. Pride and greed are a trader's worst enemy. Pride prevents them cut their losses by selling a losing share. Greed cause them to lose their profits by refusing to cash in on a winning share.
Whenever a trader feels any sort of pride, greed or emotional attachment settling in, they should sell straight away.
Setting a Stop Loss
Stop losses are a great tool to prevent traders from losing too much money on a single trade. Traders can advise their stockbroker to immediately sell if the shares drop to a certain price. A 10 per cent price drop is generally regarded as a good stop loss.
When the price of shares go up, traders can move the stop loss up with it to ensure they bank their profits.
A stockbroker will alert a trader if they reach a stop loss. Make sure that old enemy pride doesn't make you choose to ignore this alert!
Market Makers
One important element of the stock market to remember when considering whether or not to sell a share is the market makers. These are the middle men who ensure that there is always somebody available to buy shares from and sell them to.
In order to make a profit, the market makers ensure that there is a gap between the price a share can be bought and sold for. This is called the spread and means that as soon as you buy a share you will be in down by a small percentage. Shares with a spread of over 5 percent are a significant risk as they will need to rise by this percentage just for the trader to break even. There is little point in selling a share which has risen by less than the percentage of a spread. Spreads tend to grow right after they have been tipped by experts, so it makes sense to wait a few hours before buying any of these recommendations.
Another profit-making tactic used by market makers is called tree-shaking. This is where they dramatically drop the price of shares in order to scare shareholders into selling on the cheap. If the price of a share drop dramatically and there is no evidence why within the news or company press releases, then it is 90 per cent likely to be a treeshake.
Target
Stop losses are a great tool to combat pride and it is advisable to set a target which you expect to sell a winning share at as well to combat greed. These targets should be set according to the research of share price trends performed prior to purchasing the share.
However, if the share looks like continuing to skyrocket, it may be advisable just to alter the stop loss and keep hold of that cash cow.
A good target for playing the stock market is between a 10 and 20 per cent annual profit as this is far higher than you could expect to earn in any similar investment.
Summary
- Don't be emotional - pride and greed are a trader's worst enemy
- Use stop losses and stick to them!
- Don't take small profits if there is a high spread
- Beware treeshakes
- Set a target according to your research
By researching a share properly and following these tips, it can be possible for anyone to get rich playing the stock market.
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