Stock Tip #1, Take Profits By Selling Half Your Position

I am starting a new series for the blog on simple but extremely effective stock trading tips for new and intermediate experience traders. I will add a tip every few days and eventually will create an archive of all tips just like the stock education page.

Most investors never consider selling half their stock positions because they simply never thought of it as being a strategic play. When the circumstance are correct though, like for instance taking profits, investors can help themselves effectively make more money trading stocks.

Learn to consider selling half a position in a given stock as a part of a short term investment strategy.

The typical investment strategy involves simply “buying stock xyz, holding stock xyz, selling stock xyz for a profit.” This is wonderful if holding for long periods of time (6 months or more) and the investor wants to sit through all the price swings, but the experienced trader knows otherwise.

The most common ways to implement selling half a position into an investment strategy include:

  • selling half to take profits off the table
  • selling half to minimize downside risk (losing unrealized gains)
  • selling half to minimize risk while taking profits off the table
  • selling half to take profits off the table, then re-buying the shares at a more competitive price

Selling Half to Take Profits

Especially useful for newer traders who are constantly combating investment emotions, selling half a position simply to take some money off the table can be a very smart play.

Minimize Downside Risk

Seasoned traders know that calculating risk is a huge piece of the puzzle when it comes to investing successfully online. A very simple way to lower risk with an underlying position comes with selling half a position flat out.

Minimize Risk + Take Profits

Hypothetically let's say an investor is in a stock that just surged 20% in a single day and hit all time price highs. With very substantial unrealized gains now in the portfolio, by selling half the position that investor can seal in some profits and lower overall exposure (minimize risk). A double edged sword.

Take Profits, Re-buy at a Lower Price

A seasoned investor knows and understands how their long term stock positions can fluctuate in price while still remaining in a general uptrend. Just like watching the waves off a beach, by watching a stock over time investors can get a read on the overall price patterns. If they suspect a short term correction is around the corner but still want to maintain a portion of their position they can sell 50% and look to rebuy if the stock drops to help squeeze out some extra profits.

Comments

  1. Posted by Market Folly on August 22, 2008 at 2:04 pm

    good post and good idea on the overall series of posts to come with this kind of advice for newer/intermediate traders.

    one thing i might add though is addressing *when* to sell half your position. you briefly touched on it with the up 20% in one day example. But, maybe talk about how a trader should establish a set of rules.... say if a trade reaches within X% of your price target, take half off. taking some profits after a 20% intraday move is a no-brainer. Its the moves that aren't so big that make traders face difficult decisions.

  2. Posted by Blain Reinkensmeyer on August 24, 2008 at 9:55 pm

    Good suggestion and appreciate the feedback! Perhaps I will have to make this a future tip.

  3. Posted by Paul Savino on June 3, 2009 at 2:20 am

    Dang. I wish I understood stock trading. I have a stock that I bought 3 years ago at 3.46 per share (50,000) It is not at 8.29. I just let it ride.....not knowing how to 'take some of the profits'. Sure, I know how to sell...but wouldn't selling 15k shares raise my pps and then not allow me those 15k shares to make a profit with? Wow, I really don't get it. is there a very simple book, or website, that is a good place to learn....REALLY BASIC...with lots of examples! lol. HELP!

  4. Posted by Blain Reinkensmeyer on June 4, 2009 at 12:38 am

    Hi Paul, good question and the short answer is no. I just emailed you though to explain in further detail!

  5. Posted by chris on September 11, 2009 at 12:00 pm

    By selling Half my investement, Do i get TAX on that as though it was an income? Doens't seem fair if I do, because I'm only pulling money out that I've already payed Tax on.

  6. Posted by chris on September 11, 2009 at 12:03 pm

    What I mean is; I invest $5000 in a stock, it doubles and now i have $10000. I pull out the $5000 I invested, Does that $5OOO get taxed?

  7. Posted by Blain Reinkensmeyer on September 14, 2009 at 7:13 pm

    Hi Chris,

    Great question.

    Yes, you do get taxed. The $5,000 sale is considered capital gains because they assume you sold for a profit based on the shares, not the dollar amount. So lets say that $5,000 was 100 shares of a $50 stock and now the stock is at $100. Well selling 50 shares (50%) means you have realized $2500 in realized gains from the original $2500 invested ($5,000 - $2500). That $2500 is subject to capital gains taxes :)

    Hope that helps!

  8. Posted by wuddychunk on October 25, 2009 at 5:51 am

    I can accept that eventually shares need to be changed in to cash to be spent. Therefore realising profits at least. What if you sell a share and it keeps rising in price? There is no point in buying shares in another company unless it is a better valued company. Surely it is better to cut losses and sell the shares in the companies that you don`t think are good value?

  9. Posted by Blain Reinkensmeyer on October 27, 2009 at 6:43 pm

    That would be another way of handling it, yup! Selling it completely can work too.

  10. Posted by Steve on August 16, 2010 at 12:15 pm

    Hi Chris,
    Please explain...if a share grows 8% and you have 30k then your profit is 2.4k , is it wrong to cash this profit and as it keeps rising taking small profits, is this logically/fundamentally wrong?
    Great blog, I will be following with interest.
    Cheers
    Steve

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