A person in the stock market participates to profit and build wealth. However, the critical aspect often forgotten is that someone will get money only when the sell transaction has been executed. Otherwise, the paper profit calculated based on stock price movement is not a real profit. Technically, it is called mark-to-market (MTM) accounting. It is a variable and fluctuates based on stock price movement.
Hence, your actual profit is realized when you sell. Many myths, which people blindly follow, confuse people during the selling process. These are generally mistakes.
They show ignorance and a lack of understanding of the investment or trading process. This kind of behavior leads to mediocre returns, losses, or missing out on the magic of compounding to build wealth.
The following are widely observed myths people have about selling, in the stock market –
Myth #1: Buy low and sell high mentality.
Mistake: The mentality is to buy a mediocre business that is going to dust. But because the price is low, and in the hope that it could go high from here. It is a blind spot that makes one think that the low stock price could not go lower.
Myth #2: Buy at the bottom and sell at the top.
Mistake: It is wishful thinking. Ideally, it is not possible. If someone does it for a transaction, it is luck, and not to strive for the same every time. If someone waits for the bottom, then there is a high chance of missing out on that possible profitable investment or trade. On the other hand, the top could not be pin-pointed and timed to sell.
Myth #3: Sell the stock when its price appreciates by 10%, 15%, 20%, or 25%.
Mistake: Fixing the return to sell is generally a mistake because an opportunity could be a multi-bagger based on the prospectus. Few participants feel comfortable but need to remember that the compounding effect breaks and the transaction cost increases.
Myth #4: The stock has dropped below the buying price, so sell now.
Mistake: The stock doesn’t know you own it and at what price. Getting panic and selling based on a price drop below the purchase price indicates a lack of homework and conviction.
Myth #5: The stock price dropped by 5%, 10%,20%, 30%, sell now.
Mistake: It is a corollary to Myth#4. The only difference is that before selling, someone has a perceived number in mind. The stock sell is based on a percentage price drop rather than the business potential, which is a mistake.
Myth #6: Sell now. To buy at lower prices in the future.
Mistake: A naïve investor gets lured by the rise in the price of the stock. The person exhibits a hurry to sell and pocket the profit. It is in the hope that in the future, the stock price could drop and then again buy-reenter. If it is a wonderful business, selling the stock merely based on a price increase is a mistake.
Myth #7: Reduce the risk by diversifying and selling stocks to adjust the portfolio.
Mistake: It is the most ignorant argument in the investment journey. Diversification for the name sack is a mistake. An intelligent investor should construct a portfolio of businesses to meet their own objectives and goals with risk at bay.
As humans, we are influenced by our own emotions and tend to take jerk reactions. These are typical sources of mistakes.
You get solutions to successful selling strategies in my upcoming book. Stay tuned.
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