The Only Prices That Matter to Stock Investors
One of the clichés you will hear in the stock market is that there are only two prices that matter to investors: the price you pay and the price you sell for.
This certainly makes sense, but it doesn’t quite tell the whole story.
Profits or losses are solely determined by the difference between what you pay for a stock and the price you receive when you sell.
That simple math problem (less fees and taxes, if any) determines the size of your profit or the size of your loss.
However, there is a third factor that can influence the equation and that is your control over timing of the transaction.
The variable is how much, if any, control you have over when you buy and when you sell.
You have complete control over when you buy a stock and, presumably, you will buy when you believe there is a bargain to be gained, that is, the stock is under-priced or poised for significant growth.
Your reading of the situation may or may not be correct, but you make the call and live with the consequences.
On the sell side, you also have control, although not as much in a practical sense.
With no other considerations, it is assumed you will sell for a profit or to prevent further losses.
However, what if you need money now – as in the mortgage is due and you have no other assets to tap.
Even if your circumstances aren’t dire, you may find yourself in retirement and needing cash from your portfolio.
This may mean you have to sell under less than ideal circumstances.
The lesson here is that although your entry and exit prices determine a profit or a loss, sometimes circumstances force you to act at a time that is not your choosing.
Do what you have to do in a financial emergency.
However, it is always wise to have a Plan B for such occasions, which is why an emergency cash fund is so important.
With three to six months of cash in the bank (or other equally accessible place), you may avoid selling a stock at an inopportune time.
Timing is one of the risks that stock market investors must acknowledge. Protect yourself (with a cash cushion) as best you can, but it is difficult to avoid this risk
This certainly makes sense, but it doesn’t quite tell the whole story.
Profits or losses are solely determined by the difference between what you pay for a stock and the price you receive when you sell.
That simple math problem (less fees and taxes, if any) determines the size of your profit or the size of your loss.
However, there is a third factor that can influence the equation and that is your control over timing of the transaction.
The variable is how much, if any, control you have over when you buy and when you sell.
You have complete control over when you buy a stock and, presumably, you will buy when you believe there is a bargain to be gained, that is, the stock is under-priced or poised for significant growth.
Your reading of the situation may or may not be correct, but you make the call and live with the consequences.
On the sell side, you also have control, although not as much in a practical sense.
With no other considerations, it is assumed you will sell for a profit or to prevent further losses.
However, what if you need money now – as in the mortgage is due and you have no other assets to tap.
Even if your circumstances aren’t dire, you may find yourself in retirement and needing cash from your portfolio.
This may mean you have to sell under less than ideal circumstances.
The lesson here is that although your entry and exit prices determine a profit or a loss, sometimes circumstances force you to act at a time that is not your choosing.
Do what you have to do in a financial emergency.
However, it is always wise to have a Plan B for such occasions, which is why an emergency cash fund is so important.
With three to six months of cash in the bank (or other equally accessible place), you may avoid selling a stock at an inopportune time.
Timing is one of the risks that stock market investors must acknowledge. Protect yourself (with a cash cushion) as best you can, but it is difficult to avoid this risk
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