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It is very obvious that we have novice investors in the stock market than informed investors. Thus the ability to sense the signals of the bearish market or the bullish market is lacking. The term bearish market refers to a market where the prices of stocks are dropping. We say bear has persisted in the market when the drop in prices remains consistent over a period of time. Investors that buy the stock before the bearish market sets in will lose a lot of wealth in their stock investment portfolio. How to avoid or manage this kind of undesirable situation in the capital market is the focus of this article.
However, it is important to explain the term "bullish market". The bullish market refers to a market in which prices of stocks are generally moving up. When investors buy into the market shortly before a strong general stock market bullish run, great wealth will be created. In fact, some people will say the stock exchange is an avenue for quick riches. Unknown to many new investors, they probably feel this is a frequent occurrence in the stock market, seeing that they have just doubled or tripled their wealth by investing in stocks they will go for aggressive drive to raise fund for massive capital market investment but unfortunately, they may be coming into the market at a very unfavourable peak. In no time, news sensitive information will filter into the market and the prices of stocks will nose dive. So how do you protect your portfolio?
The method used for screening your portfolio from crashing in monetary value is called stop-loss method or system. Before we consider the application of the method, it is important to note that the foundation of holding a successful wealth creation is embedded in the selection of stocks that comprise that portfolio. If you made a mono-sector (one sector) selection, you will be faced with the risk of unfavourable government policy against such sector. Single -class selection can be very risky also; a situation where an investor decides to build a portfolio that is composed of only penny stocks-only Growth Stocks or only Blue chip stocks. Thus a mix of various sectors and different classes of stocks can serve as a stock absorber for portfolio.
Stop- loss method: This method is focused on the price movement of the stocks in a particular portfolio against the purchase prices. The current market price of the stock is consistently compared to the purchase price to determine the market direction of these stocks. To forestall heavy losses, the stop-loss method is a method that works like magic for some investors.
This is how it works:
Assuming an investor purchases a stock at $100 with a stop loss of 10 -20%, it therefore means that if a drop below the range of $80-$90 automatic sale of the stock is expected to be executed. But you have to maintain firm control by reason of other important inter playing factors. It's easy to be swayed by other opinions and considerations. The stop-loss system may not be a perfect system however, no system is otherwise. There would be many more rich people made simply by applying only one formula. Thus, success in the stock market is interplay of many factors. Not all shares which drop 10 or 20% go on down. By using this system you may sometimes sell a good stock too soon and frustratingly watch it go on up and up. That is the price you pay for operating a safety net.
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