Why it’s Important to Have an Exit Strategy When Buying a Stock

When buying stocks it’s easy to get excited at the prospect of making money and you probably expect to do better than the market since based on your analysis you think that your stock of choice is a great buy. However, it’s always important have a contingency and commit to selling the share if things go south and the stock price goes in the opposite direction that you expected it to go.

One way you could do this is to set a stop-loss right after buying the share. This will take any rationalization out of the process and force you into selling the stock if it drops beneath a certain threshold. The key of course is determining what that threshold should be, and a lot will depend on how much you are willing to lose, versus how much you can’t afford to lose.

If you set a stop-loss too close to the current price it could easily get triggered with the fluctuations you see in trading every day. If the stop loss is too low, then you could still end up suffering significant losses. For stocks that are not very volatile you could look at a 5% loss being a reasonable stop-loss, while for more volatile shares it might be more reasonable to set a loss at 10% or perhaps as high as 15%.

Whatever you decide, by making a plan and sticking to it you will be a more disciplined investor. The easiest way to lose money is to let emotions cloud your decision-making process.