Holding Stocks: You've Bought a Stock--Now What?

Selling To Take Profits

Eventually, you'll have to decide when to sell a stock to cash in a profit. This is a decision that takes perhaps even more skill than buying a stock. After all, your profit depends on when you sell. You'll find these strategies helpful:

• You may want to consider selling a few of your stocks if they're up 20% or more, unless they make this move in less than four weeks. Such a sharp increase in a short period, provided the market is in a general uptrend, usually means a stock is strong and could be headed for greater gains.
   
• A stock reaches a "climax top." This is when the stock's price has moved up for many months, then suddenly surges, typically 25% to 50% or more, in one to three weeks.
   
• A stock's price-to-earnings ratio (stock price divided by annual earnings per share) rises at least 120% from the buy point off an earlier basing chart pattern. Historically, this is the point when some stocks exhaust their advances.

Monitoring The General Market

You may be right about a stock, but if you're wrong about, or not paying attention to, the market's direction, you could suffer losses. Three out of four stocks will go down when the market declines. If you initiate purchases when the market indexes are beginning a downward trend, you can run into trouble.

This is a time to be patient and watch for the stocks likely to lead the market in the next upswing. The lesson titled "Leading Stocks Are Leaders For A Reason" explains how to spot emerging leading stocks.

That's why it's important to understand how the general market is acting. With enough study, signs of a reversal become clear. The Big Picture explains the forces moving the market in plain English to help you evaluate the pivotal points in trading activity. This feature is on IBD's front page.

'Pyramiding': Capitalizing On A Great Stock

A prudent but more complex way to get into a stock is to piecemeal your purchase as it proves to be successful. Let's say you're investing $5,000 in a stock. You could start by buying half that amount up front, or $2,500. Then watch what happens. If the stock goes down 8% or more, sell it all.

But if the stock goes up 2% or 3% and still looks healthy, consider buying another 30% of your planned investment, or $1,500. If the stock goes up again, to where it's advanced 5% above your purchase price, then buy the remaining $1,000. This strategy is called pyramiding.

This way you add resources to your most powerful stocks. Pyramiding is a complicated strategy best executed with the aid of stock charts that help determine if you're making the right moves at the right time. Always make sure the market is in an uptrend. You also need to watch for "overextended" stocks that have gone up drastically and may be due for a drop in price. To avoid this, buy stocks soon after they take off from a sound basing chart pattern. The stock-selling course explains how to spot these situations.

 How Many Stocks Should I Own?

One of the first decisions you need to make is how many stocks to buy. This really depends on how much money you're investing.

Unless you're a professional trader, you probably shouldn't buy more than six or seven stocks, even if your portfolio is $100,000 or $200,000 or more. The more you own, the harder it is to track and analyze them all carefully. But you can make a meaningful profit on just one or two good stocks. Buy your stocks one at a time, letting each prove itself by showing some progress before you buy the next one. Don't plunge and buy a whole portfolio at once.

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