PostHeaderIcon Understanding A Profit/Loss Plan For Investments

Stock investors usually focus on just trying to follow the age-old principle of buying low and selling high. It seems such a fool-proof adage for the general investing public. But in reality, investors may not always be faced with such simple circumstances. The stock market can get quite complicated at times. There are times when human emotions set in.

It is human nature for most investors to take pride in the successes their investments enjoy in the market. But in the same way, many investors just can’t stand losing. That is why, when faced with a falling stock investments, most will try to hold on to it in hopes that these stocks will rebound, therefore averting losses or investment failures. But for the most part, these investments just keep on falling until they become just a small fraction of their initial value. Investors would have fared better if they could have just accepted the early losses and let go of these falling stocks rather than holding on to them for such a long time. This is where the Profit/Loss Plan will prove to be useful.

What Is It?

Basically, a Profit/Loss Plan is a means to set certain limits on gains and losses an investor may expect from a certain stock. The investor sets the maximum limits on profits or losses on stock investments that will trigger an action of letting go of it. It becomes an especially important tool to use in enforcing a disciplined approach to stock market investing.

Profit/Loss Plan Advantage

One distinct advantage of having a profit/loss plan is that it minimizes the potential stock picking mistakes that many investors are bound to make. It can be a means to make up for the mistake by minimizing losses before they become even uglier. It also helps give investors a more disciplined approach to investing, trying to do away with some of the emotional factors that usually lead to mounting losses for most stock investors.

Making A Profit/Loss Plan

Although it might look easy to come up with a profit/loss plan that an investor can follow, it is actually quite difficult and also challenging. One thing to consider is that not all stocks behave the same way in terms of price activity. There are also other factors that need to be considered to determine their value and their potential. That means that different stocks in your portfolio may have different limits for maximum gains and maximum loss limits. Investors may need to keep track of this and other factors to make the profit/loss plan effective.


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