Owning shares can be exciting, but it can also be stressful. Watching your investments go up and down on a day-to-day basis can make you wonder if it's time to sell.
Maybe your shares are worth less than you paid for them. Or perhaps they’ve gone up a lot, and you’re worried about missing out on profits. It’s a tough call. Even famous investors find it almost impossible to time the market perfectly. But there are some things you can do to help you make better decisions.
Don’t let your emotions be the boss
It's easy to get caught up in the excitement or fear of the stock market. But your emotions can be a bad guide to investing.
To make the most out of investing, patience is key. The longer you hold your investments, the better your chances of seeing them grow. That means ignoring the day-to-day ups and downs. Aim to hold your investments for at least five years, ideally longer.
Historically, the stock market has tended to climb over time. So, while it's normal to worry when things look shaky, try to keep a long-term perspective. Remember why you invested in the first place. This can help you avoid hasty decisions.
Diversification is also a key principle of successful investing – and it means spreading your investments across different assets to reduce risk. Think of it as not putting all your eggs in one basket. By investing in a mix of shares and bonds, and investment funds from various industries and countries, you can protect your portfolio from big losses if one single investment struggles. Concentrating your investments in just a few single company shares can be risky.
Of course, it’s important to note here that if you’re ever unsure about what to do with your investments, it’s always wise to seek professional financial advice. And that past performance isn’t a guarantee of future results. Share prices can go up or down, and you might lose money (no matter how long you hold on to an investment).
Setting a stop-loss
Another way to manage risk is to set up a stop-loss order. You can do this by instructing us to sell your shares if the price drops to a certain level. This can help protect you from big losses.
There are two main types: stop and trailing stop. A stop-loss sells your shares when the price falls to or below a specific price. A trailing stop-loss adjusts as the share price rises.
For example, if you buy a share for £1 and set a stop-loss at £0.90, your order will trigger if the price falls to £0.90. Your shares will then be sold at the price available in the market at the time of execution.
A trailing stop-loss is slightly different. You might instruct us to sell the share if the price fell by £0.10 from the current price of £1 or any higher level it might reach. For instance, if it reached a high of £1.50, any sale would then happen when the price fell back to £1.40 during the time limit of your order.
Ultimately, though, stop-loss orders aren’t foolproof – and can’t guarantee profits.
How to set up a stop-loss order in your account
On Smart Investor, you can only set up stop or trailing-stop orders on shares, ETFs and investment trusts.
You can do this by logging in and choosing ‘Sell’ next to the investment you wish to set up the order for.
You’ll be directed to the Sell order screen and can then select the order type from the drop-down list.
You then need to tell us three things before setting up your order:
- The stop price – This is the price at which, if it is reached, you want us to sell your investment and the amount of shares you want to sell in this order. There is an optional limit price field as well.
- The expiry date – You also have to tell us how long you want the order to run for. Stop and trailing orders can be placed for up to 30 days.
- The amount – Specify either the value you want to attach to the order or the quantity of shares you want us to sell.
If your price isn’t reached or passed by the date you set or within 30 days, your order will expire without an order being placed.
Spotting overvalued stocks
One other reason to consider selling a share is when you believe its price has become inflated compared to its true worth. However, determining if a stock is genuinely overvalued can be difficult.
A share price rising without matching improvements in earnings might signal an overvalued stock. Other factors like new leadership, industry changes, or new competitors can also affect a stock’s price.
One tool to consider is the price-to-earnings (PE) ratio. This compares a company’s share price to its earnings. A high PE ratio might suggest the stock is overvalued, so it’s worthwhile comparing it to other companies in the same industry.
Please note: This article is for general information purposes only.
