Why To Always Lock In Profits In The Stock Market


Investing in public companies by purchasing some shares can be an excellent way to increase your wealth. 

However, one of the steps in this process requires you to know when to lock in profits. Having one or more strategies in place should make it easier to know when to click the sell button.

Determining a Suitable Price Target

After you have purchased shares in a company, one of the first steps to take is to set a reasonable price target you’d like to see the stock price achieve. 

This action can be done by examining the fundamentals and determining a fair value, utilizing technical analysis or a combination of both. If you’re using technical analysis and want to know when to lock in profits, you might use the last resistance point if you purchased a pullback.

Selling a specific number of shares when target prices hit is one option you can take with this strategy. 

Another option you might want to utilize is to set a protective stop on the price to ensure you book some gains. It can be frustrating to watch a stock hit a price area and then continue to drop a great deal without receiving any profits. 

Setting a stop-loss order solves this problem. Deciding to sell shares requires you to examine the cost as well. According to the experts at Money Morning, “Depending on whether you opt for a real-life broker or a convenient robo-advisor, you’ll need to consider the costs and value associated with each.”

Utilizing a Tax Strategy

Another strategy you might want to consider when you’re selling some of your stocks is its effect on your taxes. The profits you receive can be taxed at a different rate, depending on the timeframe you’ve held your investment. 

If you sell stocks before a year has elapsed, you’ll pay short-term capital gains, which can be taxed at a higher rate. Examining the variables between long-term and short-term capital gains is essential to save as much money as possible when you pay your taxes.

Purchasing Puts

Protecting the gains you’ve made with a stock can also be done by purchasing puts. This investment vehicle is designed to pay you if the price of the stock drops. 

If a significant news announcement is pending, you may want to invest in a small number of puts to protect your position. Taking this action allows you to stay invested in a stock and keep your gains protected at the same time. 

It is important to know that puts will expire worthless after a certain period. Researching this strategy is recommended before you decide to use it.

What Condition Was the Company in When You Invested?

Determining a price target where you can take some profits can also be done by examining the company’s condition financially when you initially invested. Is it a distressed, mediocre, or great company? 

If the company was distressed and still hasn’t grown profits, you may want to sell your shares and find a better opportunity. If you bought shares in a mediocre company, it’s essential to make sure they continue to operate as a going concern. 

While the shares of this company can be held to see if an improvement occurs, you should be looking for a better opportunity. Investing in a great company that continues to excel allows you to stay invested.

Having a sell strategy in place will help ensure you continue to book profits. Using one or more of the methods listed above should be all you need to get started.