Lesson 9: You don't need to sell all your shares

LESSON #9: SELLING STOCK ISN'T AN ALL OR NOTHING TRANSACTION Lucky you, you get 2 lessons in one day. :) Most people treat their stocks as if all of the shares need to be dealt with together. That's not a good way to think of things. Think of the cash value, not the amount of shares you have. You don't have to sell every share you have of a stock, you could sell 1 share if you wanted to. You can use this to your advantage to pull out profit as a stock is rising while still keeping in the initial investment. Here's an example: Lets say you have $5000 and you buy stock XYZ for $15. We do the math and figure out we can afford 333 shares with a bit of cash left over. We want to make $500 profit, so we add that to our initial investment, so that's $5500. We divide that by the number of shares we bought and get $16.51. Low and behold, we wake up and realize that XYZ is up to $16.51 today! So, do we have to sell all of our stock? No way! We simply take the profit amount we were after ($500) and divide it by the current stock price ($16.51) to get the number of shares we need to sell to pocket our profit! So, we figure out 30 shares is close (we round down a bit) and sell 30 shares at $16.51 and pocket $495.30 and we still have 303 shares of stock left, which is now valued at $5002.53. Then we add our $500 to that value, $5,502.53 and we divide by the number of shares we have left to get the new price we're looking for $18.16. The stock goes to $18.16 and we do the math again. $500 / $18.16 = 26 shares to sell. We sell 26 shares at $18.16 and make another $472.16. Now we have 277 shares of stock worth $5030.32 and we have cashed out $967.46. Your initial investment amount is still there and you have $1000 in your pocket instead of at risk. If the stock starts dropping, it's not such a big deal because you've been taking profit out along the way. Now lets say the stock dumps and goes down to $13. If you had 'Invested' you would be sitting at $4,329 or a loss of $671 with your 333 shares of stock. If you had Traded you'd be sitting at $3, 601 in stock and $967.46 in cash $4,568.46, a loss of $431.54, so you lost 1/3rd less BUT you have cash! You can buy more shares now at this lower price! So you take your $967.46 and divide it by $13 and find out you can buy 74 more shares! Add that to your 277 shares you still have and now you have 351 shares. 18 more shares than the Investor. So, the stock then goes to $15, where we started. The Investor has broken even. The Trader is up! $265 up or 5%! Isn't it worth a little effort to gain 5% on your money on a consistant basis? The only way an Investor can beat a trader is if the Investor buys at the absolute bottom of the stock price and the stock only goes up forever. The Trader should always win by being able to compound their amount of cash and shares in an accellerated manner, not to mention having the ability to take the sell off cash and using it to buy other stocks to diversify instead of risking 100% of the cash in one stock.