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Use this investment strategy to protect the money you've made in stocks

by , 11 June 2015

You invest to make money. You want to see the stocks you buy rise in price over the years.

Once you've made decent gains, you may start to worry about protecting these gains. Should you sell to bank those profits?

Read on to discover a strategy that can help you protect your profits…


The virtues of a trailing stop loss


One way to protect the money you’ve made in stocks is to run a trailing stop loss on each on your positions. A trailing stop loss will limit your losses and protect your profits if your investment starts to move in the wrong direction.

The percentage you pick for your trailing stop losses is very much up to you. But you could opt for 25%. This means if the price of your shares drops 25% you sell.

For example, you buy a stock at R40. Using a 25% stop loss at that level, if the share price falls to R32, you sell. You lose R8 per share.

A trailing stop loss also protects your profits as it moves up with the share price.

Let’s say your R40 share rises to R50, then falls. If it hits R37.50, you sell.

By using a 25% trailing stop loss, your portfolio will never fall by more than 25%.


How to determine the best stop loss level for you


If you’re not happy with 25%, you could use a tighter stop loss of say 15% or 20%. It’s up to you. The important thing is you stick to it.

But if you make your stop losses too tight, you risk having to sell out a position because of market volatility.

Another thing you can do is once you’ve made substantial gains on a particular stock is to tighten your stop loss to 10% so protecting more of your profits.

You can’t remove the risk of losing money with stocks, it is part of the investment game. But you can limit your losses by using an investment strategy, such as a trailing stop loss.

So there you have it. An investment strategy to protect the money you’ve made in stocks.

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Use this investment strategy to protect the money you've made in stocks
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