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Written by Administrator   
Thursday, 26 March 2009 02:27

I am trapped in a falling stock! What do I do!?

This is a common problem - you buy a stock, maybe only being in it for a short time, and it starts to plunge! Now you are losing money!! What do you do?

Well I can certainly relate to this problem, because i've been in this situation so many times i've lost count! And what you do about it really depends on why the stock is falling, and that's where you have to do a little homework. Did some bad news just come out about the company? If so, how bad is it? For the most part, all companies come out with news at one time or another that can be considered "bad", but that's not necessarily a reason to sell the stock. You really have to decide if the news is enough to turn the company from a "good" company worth investing in, to a "bad" company you don't want to own. To me, news that is truly "bad" is news related to things like accounting issues or earnings restatements, fraud, SEC investigations or major lawsuits, and I will strongly consider selling in those situations. Otherwise I really need to assess the news and take it on a case by case basis.

Now, lets suppose the stock is falling and there's no obvious bad news that you can find. Should you sell? Honestly, that really depends. Unfortunately the reality of the stock market is that you can have the best company in the world, but even those stocks can go down for days, weeks or even months at a time if they are in a prolonged down trend. This may not be the case with your stock, but are you willing to make a commitment to stay in the stock for however long it takes before you start seeing a profit? If not, sometimes it's better to consider cutting your losses early on, rather than waiting it out and risking further losses.

Don't panic

Here's something to consider - the minute you buy a stock there's about a 50/50 chance that even before you hit the "refresh" button on your browser you are going to be losing money, even if it's just a fractional amount. In fact, all stocks go up and down on a daily basis, so this is totally normal. So you do have to be prepared to initially lose some money when you buy stock, if only a small amount. The problem comes in when the stock continues to go lower, and that small loss starts to turn into a larger loss. What then? If you're in the stock for the long haul, then there may be nothing for you to do other than sit back, take a deep breath and relax. But if you aren't that committed to the stock, what you really have to ask yourself is if you have a cutoff point where you won't stay in the stock if it falls below a certain price. This is never an easy decision, since nobody likes to lose money. And sometimes a decision might seem like the wrong one... there's nothing more frustrating than selling a stock at a loss, only to see it turn around and go back up after you've sold it!

Here's a question I ask myself which sometimes helps me make the decision as to whether to sell or hold a falling stock: Will I feel worse if I hold and it goes lower and I lose even more money, or will I feel worse if I sell it now at a loss only to see it turn around and go back up?. This is not an easy choice, but sometimes it's necessary. If I end up selling a stock at a loss, my rule is that I take the stock off my watch list and I don't look at it again for 30 days. That way if the stock goes back up, I am not going to be watching it and getting upset that I sold. If you continue watching a stock after you've sold it at a loss and it goes back up, it's very tempting to want to buy it back again at a higher price (or "chase" it), only to have it then go down again afterwards, putting you right back in the situation you were in before, only now with a bigger loss! Talk about adding insult to injury!

Anyway I think one of the best things you can do is have a plan in place the day you buy a stock. If you think the stock is a long term hold and you're prepared to ride out any losses, then if it falls just try and relax and not let it bother you. But if not, have a set price in mind where you'll sell it if it falls to that price. Many brokers even let you set a "stop loss" on stocks just for this reason. If your stock falls to a certain price your shares are automatically sold, so if you can't watch your stock every day you don't have to worry about it. (I will be adding more information about stop losses later, since it is good to know how to use them in case you ever need them). In any case, knowing your plan ahead of time is a good idea, rather than waiting until the stock is falling and you're in a panic trying to figure out what to do. Whatever you decide, just make sure you are comfortable with your decision and that you won't regret it later, no matter what happens!

Good luck and I hope this helps.

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Last Updated on Saturday, 28 March 2009 02:04