When To Sell That Great Internet Stock?
Source:
INTERNET STOCK NEWS™
internetstocknews.com
The Premiere Internet Industry Communication Vehicle
January 12, 1999
When To Sell That Great Internet Stock?
By ISN Analyst, Ted Kunzog
Knowing that stocks over an investor's lifetime are likely to return only
10-12% per year on average, an investor should be very cautious about
their
"hot" Internet stock that recently doubled, tripled or perhaps more. With
that kind of behavior, the next move may be in half, rather than double.
So, how and when to sell?
First off, selling all of the stock is frequently a mistake. Yes, it may
have been the exact top, but it probably was not. If the stock continued to
gain again after it was sold, the investor often is consumed with mental
agony. To be a successful investor, care of one's psyche is often just as
important as picking the right stocks.
To decide when to sell, then, investors may wish to consider either
selling just enough to get their original investment back, or using Stop Orders
(sometimes called Stop-loss Orders).
The first strategy is rather simple. Assume an investor bought 1,000
shares of Hotstock.com for $5 per share (or $5,000.00) and it is now selling for
$20 per share (or $20,000). The investor would simply sell 250 shares at
$20 per share to get the original $5,000 stake back, leaving the investor
with 750 shares left. This is called "using the house's money." A
modification, of course, is to sell more than enough to return the original
investment and to lock in a profit.
The advantage of this strategy (besides the simplicity) is that an
investor
guarantees the return of the original investment or locks in a profit.
Meanwhile, the investor still participates if the stock continues to run.
The last strategy, using Stop Orders, is extremely powerfully but underused
by many investors as they do not understand them. There are two types of
Stop Orders that can be used to sell a stock, a Sell Stop Order and a Stop
Limit Order.
In a Sell Stop Order, the investor sets a Stop Price with the Broker. If
the stock price moves below the Stop Price, the order becomes a Market
Order, to be executed at the next available price.
If the investor set a Stop Price of $15 per share for 1,000 shares of
Hotstock.com and it moved below that price, the broker would automatically
sell 1,000 shares at the next available asking price, no matter if it is
above or below the $15 Stop Price. (It should also be noted the order can
be for any number of shares, not just the full 1,000 shares).
The advantage of the Sell Stop Order is that the investor is ensured that
the stock will be sold. The disadvantage is that the investor is not sure
the minimum price the sale will take place.
With a Sell Stop Limit Order, the investor tells the broker of two prices:
the Stop Price (as before) and the Limit Price (the minimum price the stock
should be sold at). (One quick word to interject here, Stop and Stop Limits
are sometimes dangerous on the OTC BB because the exchange is actually a
quotation system controlled by market makers. They can simply place 100
share block orders until they approach the stop and leave you selling the
stock at far lower than you wanted. -Chris A.)
Assume again the investor set a Stop Price of $15 per share for 1,000
shares of Hotstock.com as well as a Limit Price of $14. If the stock moved
below the Stop Price of $15, it will then be sold at any price above $14
(if the price never returns above $14, it will not be sold).
The advantage of the Sell Stop Order is that the investor is sure of the
minimum price the shares will be sold for. The disadvantage is that the
shares may never be sold (we all know that Internet Stocks can move
extremely rapidly, both Up and Down).
One caution when using any type of stop order: avoid setting the Stop
Price too close to the current price. This will avoid selling the stock
unnecessarily. In general, the Stop Price should be kept 15-25% below the
current price. Assuming the stock continues to go up, the Stop Price
should also be raised.
The biggest advantage in using Stop Orders is that it lets the market tell
us when its time to sell. Investors should be aware, however, that not all
brokers accept Stop Orders on all stocks – something you may wish to
consider when selecting a broker!
The last thing to do after selling any stock (no matter which method you
choose) is to quit worrying about what it does after you sold it. There
will be other stocks and other days, the sun will come up again tomorrow
just as it did today. |
