# Taking Profit



## Rainbowsend_au (21 April 2007)

I am new to share trading .... often, I see the term "taking profit" ... does this mean selling all ones shares in a company, or just the portion that relates to profit over purchase price?

Thanks in advance.


----------



## vida (21 April 2007)

I would say it means any selling of shares that makes a profit, is taking a profit.  Conversely any selling of shares that makes a loss, is taking a loss.


----------



## Sean K (22 April 2007)

Yes, taking profits does not necessarily mean taking all your holding out.

One aspect of trading that interests me is that many people think that they have to commit all their relative funds to one investment, or completely sell out of an investment. I've learn't, only relatively recently, that it's much better to increment both buys and sells, to cater for any short term market anomolies, and maximise gain. 

So, taking profit doesn't mean selling 100% of your holdings. Perhaps sell 1/2, or 3/4 and let the rest ride for a little longer.....

Alternatively, if the trade is going well, buy more, and make the most of the momentum and the stock that you have so well researched. This is possibly where most money is missed IMO. 'Out too Soon' may know this.  

Having a tight stop when short term trading is possibly the most valuable tool in the armoury. Never LOSE money!


----------



## Rockyboy (28 April 2007)

OK, like Rainbowsend I too am new to the sharemarket. I also am often confused as to when to take a profit. 
I recently bought a parcel of shares at .58c. they are currently at .80c giving me a paper profit of $17,000. I hope they will go higher. My concern is if I sell now i'll never buy back in at .58c. Also i've only held for a couple of months so there are tax implications to think of. What would your advise be in this case.


----------



## eternit (28 April 2007)

Rockyboy said:


> OK, like Rainbowsend I too am new to the sharemarket. I also am often confused as to when to take a profit.
> I recently bought a parcel of shares at .58c. they are currently at .80c giving me a paper profit of $17,000. I hope they will go higher. My concern is if I sell now i'll never buy back in at .58c. Also i've only held for a couple of months so there are tax implications to think of. What would your advise be in this case.




When you say paper profit, u mean that its not real profit?


----------



## Rockyboy (28 April 2007)

Sure its a real profit but to realise this "paper profit" and turn it into bankable dollars I must sell first. What would most people do?


----------



## eternit (28 April 2007)

Rockyboy said:


> Sure its a real profit but to realise this "paper profit" and turn it into bankable dollars I must sell first. What would most people do?




Sorry, by paper profit I thought u meant u were paper trading meaning not dealing with real money. 

So, you have around 80,000 shares in this company worth ~64,000$?


----------



## rub92me (3 May 2007)

kennas said:


> One aspect of trading that interests me is that many people think that they have to commit all their relative funds to one investment, or completely sell out of an investment. I've learn't, only relatively recently, that it's much better to increment both buys and sells, to cater for any short term market anomolies, and maximise gain.




Increment buys (position sizing in the same stock) : sure, good idea.
But selling in small lots: Only worth doing if you reinvest in something else that you can be reasonably sure is going to give you a better return. (Or in the same stock but at a lower price in a short timeframe) Otherwise, the only benefit I can see, is that you proved you were right with your initial buy(Yay!, I've made a profit), but you're not necessarily maximising your returns that way ...


----------



## Brujo (3 May 2007)

Rockyboy said:


> OK, like Rainbowsend I too am new to the sharemarket. I also am often confused as to when to take a profit.
> I recently bought a parcel of shares at .58c. they are currently at .80c giving me a paper profit of $17,000. I hope they will go higher. My concern is if I sell now i'll never buy back in at .58c. Also i've only held for a couple of months so there are tax implications to think of. What would your advise be in this case.




You can't have it both ways!  If it were that easy there would be no market 'cos everyone would be trading with 20/20 hindsight.  As Kennas suggests, a wise strategy is to compromise your future _potential_ gains a bit by locking in some actual gains now. That way you can satisfy two very old, but conflicting, trading axioms:  you don't go broke by taking a profit _and_ you cut losses short, let profits run.

Would you rather the price fall back to 58c and you _haven't_ sold any at a profit? Believe me, not taking a profit when it is available can be as painful as taking too little too early.  Ask anyone in Chemeq and other disasters.

Re: tax implications - depends on where you assess this company as going.  If you think it is going to continue to grow, or maintain its value beyond the 12 month anniversary, hold.  Otherwise, flog it.  If a share price looks like it is going to retreat, better to be paying tax at too high a rate than no tax at all.  Take into account too your current earnings vs projected earnings.  If you have little other income currently, may be not that much worse off by paying tax at say 31.5% undiscounted compared to 23.25% discounted in a year where you have high income from other sources.

Also, forget the 58c as a reference point.  That was one price at one point in the past.  As there is a rule that says you shouldn't fall in love with a share, you should not fall in love with a particular price either.  Someone offloaded their shares at 58c to you.  What did they buy at?  Someone else is willing to buy your shares at 80c.  58c has no relevance at all.  

Well, they're my thoughts!


----------



## rub92me (3 May 2007)

Brujo said:


> As Kennas suggests, a wise strategy is to compromise your future _potential_ gains a bit by locking in some actual gains now. That way you can satisfy two very old, but conflicting, trading axioms:  you don't go broke by taking a profit _and_ you cut losses short, let profits run.




Ah see, but you're _not_ letting (part of) your profits run if you do that. You need to protect your risk (losses), not your profits. By protecting (locking in) your profits, you're not letting it run! Well, that's what Van Tharp has to say on the topic anyway...


----------



## Brujo (3 May 2007)

rub92me said:


> Ah see, but you're _not_ letting (part of) your profits run if you do that. You need to protect your risk (losses), not your profits. By protecting (locking in) your profits, you're not letting it run! Well, that's what Van Tharp has to say on the topic anyway...




"Part"...."part"....which is the point Kennas makes about many people thinking in terms of trading all or nothing.  You are still letting profits run, just not on your whole holding.

I said it's a compromise.

I realise there are other strategies such as stop losses, but in a volatile market a less experienced trader may find it difficult to establish a reasonable stop loss level.  I used them trading commodity futures and it sometimes proved just as frustrating - you'd set too hight and get stopped out on a technical movement, or set too low and give back a big chunk of the gain.


----------



## tech/a (3 May 2007)

People

There is a simple solution to the 

*"Take profits AND Let profits run" conundrum.*

Let a trade trade to a profit you feel is sufficient,the best you can expect or what the market will give you.

THEN

Sell the total cost of the trade
IE Initial capital and Brokerage.

Then simply leave the profit to run forever if you like.

Example
Buy $10000 of a stock at say $1.00 a share = 10000 shares.
Stock reaches $1.30.
Sell 7750 shares.---Buy another opportunity.
Leave the other 2250 open and hold for as long as you like.
To lose the lot the stock needs to be delisted.
If another opportunity presents itself in the SAME stock buy in again and do the whole process again.

Over a number of years you could have 20 or more PROFIT stocks running like the wind!


----------



## rederob (3 May 2007)

tech
not a bad idea
but inevitably it depends on what one is trying to do or achieve
one can do both
for example it makes sense to quit the more speculative stocks with a profit and reinvest in a yield stock
there will be some - maybe many - that now have the dividends pay the original purchase costs
so in those cases there is no need to sell anything and the dividend stream and growth "compound" one's profit
this is my 11th year in the markets and i can only say the buy and hold strategy has worked well for me
however i have always believed in the power of compounding and those yield stock i presently hold are testimony to that strategy


----------



## clowboy (3 May 2007)

tech/a said:


> People
> 
> There is a simple solution to the
> 
> ...




yea, the problem though tech is you can end up with alot of stocks.

Ive got 47 "profit stocks" and only been trading 2.5 years

Some have gone on to make huge returns (WMT) and some just sit around doing didly.  A few small dividend checks here and there are nice too though.  What with all the takeovers and that going on though it can get a bit emabrising, I had a few shares in AGL that I locked in as profit, after the merger/takeover my last div check for ALN was like $2.80 or something, dread to think what it is going to be like when/if babcock takeover.


----------



## Brujo (3 May 2007)

That's exactly the answer to the "take profit and let profits run" conundrum.  It's not really a conundrum, even.  

Sell some, let the rest run.  How many you want to sell depends on your objective.  I think many traders would be doing the partial-sale-and-diversify thing at the moment with so many shares running hard.

I'm usually more than happy if I can retrieve my capital and still have 50% of the initial holding to run for the longer term.  

I got BMN at 49c post-split equivalent, was more than happy to sell 25% at $1.90.  Got MTN at $2.00, happy to sell 1/3 at about $5.50.  Got PIM at 20c, happy to sell part at $1.10 (although that share is so illiquid it'd be difficult to get out quickly). Not big parcels, but still happy to have realised a profit no matter what happens to the share price.  

Other companies I'd never expect multiple returns based on fundamentals, just safer smaller returns, therefore happy to bail 100% out of IGR at 40% profit, or TAM at 20% profit.

In any other market, these are still very very healthy returns.

Because despite what every bone in your body may tell you about a company, or whatever analytical logic you may apply, things don't always work out.  I have a long old memory of CIBC putting out a buy recommendation on Pasminco (at about $1.20 I think) approximately two weeks before it went under.

Probably of more interest is what's the best strategy if a share price is falling?  Back your judgement and stay in for the long haul?  Average down?  Admit you might have got it wrong and bail?


----------



## Brujo (3 May 2007)

The most difficult thing to do in _this_ market is to convert some of your holdings to actual cold hard usable cash!!!

What do you sell if nearly everything is performing, yet you don't want to risk being there if a major correction happens??

This is tougher than trying to work out when to take profits from a particular share!! Having to overcome that feeling of not wanting to miss out, yet not wanting to risk the lot!


----------



## tech/a (3 May 2007)

*I'll make the solution even easier.*

Dilute your universe of stocks traded.

Pick say 10-50 stocks and trade the blazers out of them.
Build on winners liquidate losers.(Ie if they lose 33% of PROFIT 
put the rest in the best performing WINNING Stock held!)
You'll soon dilute your winning profit stocks.

Come on your all making it harder than it need be.

*How about some creative thinking*!!


----------



## shinobi346 (3 May 2007)

tech/a said:


> People
> 
> There is a simple solution to the
> 
> ...





I like this but I'd probably take 30-50% more out to cover taxes as well.


----------



## tech/a (3 May 2007)

shinobi346 said:


> I like this but I'd probably take 30-50% more out to cover taxes as well.




Yes you could but ONLY when you take out PROFIT.
If your just taking out the cost then there is no tax applicable ---YET.


----------



## clowboy (3 May 2007)

tech/a said:


> Yes you could but ONLY when you take out PROFIT.
> If your just taking out the cost then there is no tax applicable ---YET.




Im pretty sure that statement is wrong, as a trader if your in profit you pay tax.  As an investor you pay tax on the porportion that you have liquidated do you not?

As for limiting your trading universe, it's a great idea, but in practice if a stock shows up that has potential to turn a profit but isn't in your universe do you just ignore it?


----------



## rub92me (3 May 2007)

All the arguments I've heard so far drive diversification of the portfolio, which can be a good thing to reduce the risk, but I'm not convinced that it is the most profitable strategy unless you're really really good in picking the next trade. Let's take a simple example.

Total investment in stock A: Bought 50,000 at $1 . A = now $2 so my holding is now worth 100,000.

Scenario 1 : Let's assume stock A has a 70% chance of going up by 10% or more and a 30% chance of doing worse (say the average is zero gain) in the next 3 months. I decide to leave all my money in A. My expectancy is that my investment will be worth 100,000 + 7% of 100,000 = 107,000. (worst case)

Scenario 2: Let's assume I take 50% profit and let the rest run with the same expectation as under Scenario 1. So the remainder in A (50,000) will appreciate 7%, i.e my A portfolio will be 53,500.
I still have 50,000 to play with to make at least another 3,500.
Say I have a 60% success rate in picking a winning trade and my stop loss for the new 50,000 trade is 2,000. 
40% chance of being stopped within 3 months - expectancy -800.
60% chance of winning. How much of a gain do I need to achieve to get a combined expectancy of more than 3,500? About 7,500. So I need to pick a winning stock that goes up by 15% or more to have an expectancy of increased profit. I.e. I need to find a stock that will perform twice as well as stock A. Can you really do that consistently?? If so, I'm impressed and you should take half your profits. 
I can't so I let all my profits run, not half.


----------



## Julia (3 May 2007)

Brujo said:


> What do you sell if nearly everything is performing, yet you don't want to risk being there if a major correction happens??





Doesn't this depend to a large extent on the type of share and your investment approach, i.e. if, say, you have made a substantial profit on any of the big banks, Woolworths, etc., they are continuing to be in an overall uptrend, and you are a long term investor as distinct from a short term trader (in which case you probably wouldn't be in these stocks anyway), wouldn't you be Ok with just sitting out any correction that might occur?
I don't see the point - if you have bought into a company which you regard as a solid long term investment - in selling just because a correction looks possible.  Complicates your tax situation, and costs extra brokerage.

Different story, though if you've achieved a large profit on something more speculative.  Then I'd be taking steps to protect the profit.
I'm sad to say that, before I learned this lesson,  more than once I've let profits drift away as the SP dropped.

I see a lot of people on this forum trying hard to reassure one another that some stock or other "just has to recover", quoting various aspects of the fundamentals.  Meantime the SP falls forever downwards.  GTP is a good example of this.


----------



## Brujo (4 May 2007)

Yes Julia the type and intent of investing you're doing will of course affect your decisions.  If you buy BHP, you're normally buying almost for your superannuation, (to generalise!) so a 3 month or 20% correction is not a factor.

Unfortunately my own holding is such that I almost consider Mundo and Bannerman as blue-chip!!?!, so I am pretty exposed to shorter term market corrections!!


----------

