No one likes to sell shares in the stock market at a loss, not even the most seasoned of investors. But it is something many investors may have to do, hopefully not too often, especially when they buy speculative stocks, stocks based on market trends (such as gloves stocks), or stocks with volatile prices.
We speak to The Edge Singapore’s executive editor and resident technical charts expert Goola Warden and senior financial analyst Thiveyen Kathirrasan, on when investors should let go of their positions when it seems there’s no way up.
1. When a stock starts dropping in value on the market, when do you know if it’s a good time to sell?
The short answer, according to Warden, is to have a stop loss you can bear.
“If you’re a trader, a 5% stop loss should be sufficient,” she says. “The name of the game is to let your profits run, and keep your losses small.”
For Kathirrasan, the answer is less simple. To him, the answer to this depends on the type of stock that you have bought into.
Like Warden, Kathirrasan suggests that “when you buy a stock, you should set a target total return for the stock”, and once it hits the price range you’re looking at, you should consider selling it.
“Let's say you buy a stable long-term value-investing based stock. For as long as you think the company holds value, you'd want to buy more of it when it is cheaper. In this case, you'd actually buy more as the stock starts dropping in share price, not value (value is based on the fundamentals of the company in this context),” he writes.
“However, if you buy a speculative or turnaround stock, since the risk is extremely high, it is important to also have a target for the total losses you're willing to stomach. Once the share price falls to that range, sell it,” he adds.
With stocks that may see more volatility due to the number of trades performed amongst investors, Kathirrasan advises investors to set a sell order. Investors seeking to make a minimum profit can set a floor of 20%, for example. For Kathirrasan, he says the floor order can be increased by 1% if the stock goes up by 10% each time, especially if it’s a volatile counter.
SEE:7 money tips for young adults who want to retire early
“That way you guarantee a minimum return of 20% (or whatever target you have set for yourself), but if the share price goes up to 30% you'd be making more than what you've expected. The number you set for your floor order really depends on your personal targets,” he says.
To sum up, Kathirrasan recommends investors to list down the stocks they are looking to buy, and at the end of the day, investors should stick to their targets and “set necessary safeguards”.
That said, he shares: “If you want to make more returns you'd have to buy riskier stocks.”
2. How should you mitigate your losses when your stock seems like it has gone past the point of no return?
If you’ve been fervently monitoring the charts and see prices going past the support line, Kathirrasan advises investors to cut their losses and “sell it as soon” as they can.
The way he sees it, “the more you wait, the more you'll lose out on other companies that have better potential returns”.
“It is okay to lose out on some stocks because know that the most a stock can drop is a 100%, but the most a stock can gain is more than 100% - so be optimistic when you've lost out terribly on a stock, and put that money into something which is fundamentally good or you think is undervalued,” he shares.
However, Kathirrasan adds that his answer is “based on the assumption that ‘the point of no return’ applies to the fundamental value of the company, where it is in a state that makes it impossible to recover, no matter how cheap it may seem,” he says.
That said, if you want to make money in the stock market, especially on more volatile stocks, “you have to put emotions aside and let go of stocks that are fundamentally terrible, and have dropped significantly in its share price,” he adds.
For Warden, the answer is straightforward: it depends on how much losses you can bear. “There are various indicators that can give you an idea of whether your stock has gone past the point of no return. On the fundamental front, check the stock’s capital structure. This should give you an idea whether the stock has been accreting earnings or shedding them,” she says.
“Technically, if you keep to your stop loss level and stay disciplined about it, you’re unlikely to run into large losses,” she adds.
3. How will you know if your stock may rebound again?
“Research is key”, emphasises Kathirrasan, who is a big believer in assessing the stock’s fundamental value.
“Revisit the thesis on why you bought the stock in the first place. If the company's fundamentals have changed significantly, then assess if it is in a positive way or negative way,” he says.
“Stocks that are fundamentally strong will more often than not increase in share price over time. But do not tell yourself that it will rebound solely based on the fact the share price has tanked.”
On a technical aspect, Warden says traders could “look for oversold levels”.
“An oversold condition is simply when everyone has sold and there are no sellers left. Take a room of 10 people and pretend they are the stock market, for example. They’ve all invested in stock ABC. At some point they start selling ABC. If all 10 have sold ABC, there is no one left to sell ABC and the stock is oversold,” she explains.
“In real life, it’s not so simple. Indicators such as stochastics and RSI give an indication of whether a stock is oversold. Stochastics has buy and sell lines at 0% and 100%. RSI also ranges from 0% to 100% but because of the calculation it never quite gets there. The buy sell lines are at 25% and 75%. Anything below 25% is an indication that the stock is oversold,” she adds.
Since it’s a herculean task to monitor stocks and their fundamentals constantly, technical analysts believe all the information is encompassed in the price as it reflects the market’s participation. Whatever investors use - whether it’s fundamental analysis or technical analysis, or a combination - they should have a goal in mind, such as returns in the case of equities, or risk management when using derivatives or diversification when investing in alternatives.
For more stories about where the money flows, click here for our Capital section
4. While there is no 100% certainty when it comes to predicting a growth or dip in share prices, how should beginner investors prevent similar instances from happening too often (i.e. buy into a loss-making stock)?
The short answer? Read our coverage and analyses at The Edge Singapore.
That aside, Kathirrasan says investors should set goals and objects that “make sense and are pragmatic”.
“Sure you can target 50% returns for a stock, but you have to be willing to accept 50% losses on the stock too. Compare alternatives, how much you'd save from your active income, how much you'd make from fixed deposits (FDs), how much you could gain from rental income through property investment, etc,” he shares.
“Once you've set that, you'll be able to identify the type of stocks that could potentially give you those returns. Then, research and read about these stocks, and buy it, especially if you're buying into a loss-making stock. Everyone can take risks, but make sure your willingness to take risk does not exceed your capacity to take risk.”
See also: Warden’s technical analyses on the stock market, as well as Kathirrasan’s international stock picks for 2021, and how his 2020 portfolio outperformed the market
