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Protect Your Stock Portfolio From False Signals

Nov 2, 2007
Most new investors have a fair idea when they should sell. The standard is 10% loss, and it is time to sell. There are dozens of gurus who offer all sorts of signals and red flags to help investors learn when to invest and when to buy or sell. Some gurus say 'It's time to sell when the points turn negative.' All of this information is good, but the investor needs to learn how to identify false signals.

There are some events that can fool investors into selling, but misreading the signs can result in having the portfolio compromised.

Falling Stock Price

A drop in stock prices is not necessarily a reason to sell. In fact, it may be a reason to buy, as the market 'corrects' itself and prepares to take off again. This is because the stock does not always reflect a company's true value.

Take a good look at the company's current bank reports and any press releases, or other communication and PR releases. View the local newspapers and other information before letting emotions and panic force a sale. In fact, it could be a panic based on gossip, or other market factors dropping the stock price.

Rising Stock Prices

It is amazing to think of a panic caused by rising prices, but it happens all the time. Investors create an arbitrary number in their head and then they sell at that point, regardless of what the market is doing. Unlike the 'real world' stocks are not controlled by the law of gravity. Just because they go up, doesn't mean they must come down.

Bad News and Gossip

One of the most dangerous thermometers for a stock's health is gossip and rumors. Bad news can send a stock plummeting within hours, and then several weeks later it corrects, or increases. Never base a trade on emotion, fear, or gossip. Even if the company is a train wreck coming to a screeching halt, there is usually time to do some serious investigating and 'get out' before suffering a loss.

Stock Screens

Stock screens are tools that let investors sift through the stocks until they find those which meet certain criteria. These computer programs reduce the number of stocks up for consideration, reducing the time an investor spends researching their choices.

The important thing is to read the fine print before investing money into a screening service, especially if they suggest they can produce winning stocks every time. Problem is, these screens often work in real-time and do not calculate the long-term performance of the stocks. The stocks are not interested in Repeat Performance. Few people can buy 50 stocks at a time and turn over 25% each month, to match the results implied by the screen. Just remember that screens are a great tool - but don't expect to duplicate their performance.

Understanding Loss

A loss is a loss whether the investor sells, or not. However, risk is only a tangible amount in the bank account if the stock is sold. A stock may drop 10%, but that does not mean that the investor has actually lost 10% - yet. The stock may rally, or it may continue to drop. The investor should also consider the fees incurred when selling.

Understanding the industry, and keeping an eye on a company's financial reports can help investors understand the difference between a correction, a fluctuation, or a true loss.
About the Author
Mark Walters is a third generation entrepreneur and author. He offers free training and investing videos designed to speed you towards financial independence at http://www.cashflowinstitute.com/videosignup.htm
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