The market is a balance between buyers and sellers. In order for one person to make money, someone else needs to believe in an equal or opposite reaction.
If you want to buy, someone has to sell
If you want to sell, someone has to buy
You sell because you think it will not go higher, someone else believes it will go higher
You buy because you think it will rise, someone else is taking profit, cutting losses, believes it is not worth holding anymore, or believes price could fall.
If everyone thought to hold their position, there would be no sellers and price would rise. This is basic supply and demand.
Remember that all stocks have x-amount of shares available for trading
If all shares are being held, there can be no buyers in the market (no sellers)
If no one wants to sell, the price rises (see GameStop's, GME, rise)
At some point, smart people get out and take their profits. These people worry less about what it could be, secure their profit, and they do not look back. Some often have a percentage they are looking to gain (return on investment) or use other technical analysis to determine their exits.
This secures profit and avoids turning winners into losers and avoids bag holding
Wait too long some times price drops lower than the price you purchased the shares
Bag holding - when you hold on to a stock that has dropped below your price and you hold on in hopes that it rises again.
In general, it is important to secure profits and to ensure you do not incur losses
Exceptions to the rule are long term strategies that you have held over the years
In long term strategies, you are often collecting dividends, premiums from selling covered calls to offset the price decreases, or you are simply holding because you believe it is worth more long term (TSLA was once $3/share)
Regardless of strategy, it is still important to learn to scale in and out of your position to take profits and then to rebuy in on pullbacks in the market. This is known as Trading around a Core or Taking Profit.
Both secures profits at key times except for the following:
Trading Around a Core will often keep some shares to hold on to for the long play
Taking Profit sells off all holdings
Trading Around a Core (TSLA Example)
We purchase 100 shares of TSLA on 06/29/2020 @$205/share ($20,500)
Let's say that our core we want to trade around is 50 shares. We believe that this company will continue to grow, but we want to secure profits along the way.
On 07/23/2020, we decide to sell 50 shares for $300 ($15,000). This gives us a profit of $95/share ($300-$95) or $4,750.
On 08/12/2020, we are close to a trend line and decide to buy in for 50 shares at $295 based on technical analysis. While the price has not changed much since we sold, we could not know whether it would sell off more and wanted to secure our profits.
On 09/02/2020, we sell 50 shares at $450/share for a profit of $250/share or $12,500.
Most people use the $200 purchase amount because of the FIFO method (First in, first out).
If you manage your taxes well, you could use the 08/12/2020 shares instead which allows you to hold your initial shares purchased on 06/29/2020 to hold for longer than a year for tax purposes
Shares that are held longer than a year are subject to long term gains (See Taxes)
This takes accurate bookkeeping and would require you to do the same for all investments, but can reap the rewards of a reduced taxation.
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