Sometimes the old-fashioned way works best for stock investors. This method of protecting stock profits requires you pay more attention to price changes.
This is the second part of techniques for protecting stock profits. The first part of the series discussed stop-loss orders.
The manual method of protecting stock profits is based on the theory that it is better to take several small profits rather than wait for a single big profit.
You can protect stock profits by setting reasonable profit goals for the stock and systematically selling parts of your holding to secure profits.
For example, if you own 300 shares of a stock you own for a good profit, you may decide to systematically sell 10% (or whatever percentage you want) of your holdings for a profit.
If the stock is still rising or has leveled off, you can continue to take small chunks of stock off the table for a profit.
By leaving some shares invested you can further profit if the stock continues to rise. If the stock price falls, you have some profits already in your bank that won't be affected.
Some people are tempted to reinvest their profits back into the stock, but this is often a bad idea. If the price has risen, you will be buying at a higher entry point, which makes future profits more risky.
A conservative approach is to either to put your profits in cash (bank account) or invest them in a non-correlated stock (a stock that is in a sector that does not move with the original investment).
For example, if you took some profits out of a technology stocks, you might want to invest the money in a non-durable consumer goods company (think toilet paper). The tech stock and the consumer goods stocks are unlikely to respond to the same economic or market conditions.
Either way, you have to pay attention to daily stock prices to make this technique work. Some investors prefer the more automatic stop-loss method, while others like to take more control over the process through these manual steps.
Part one of the series: Using stop-loss orders
