Taking Profit

[Rainbowsend_au]

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]

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]

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]

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]

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]

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]

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]

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]

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]

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]

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]

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]

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]

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!

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]

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]

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]

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]

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!

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

 

[tech/a]

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]

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?