When to sell

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9. Stoplosses

Because of these uncertainties, some investors prefer to dispense with any approach that relies on subjective judgment. Instead, they stick to another, strictly mechanical, means of timing their sales - the stoploss.

It works like this. When you buy a stock, you immediately decide on the maximum percentage you are prepared to lose if the price drops. Say you settle on 20% - that is your stoploss. Or, on a £1 stock, you might refer to it as an "80p stoploss". If the shares fall to that level, you sell automatically, no questions asked.

But if they rise, you raise your stoploss proportionately. You carry on "trailing" the stoploss behind the price as it climbs. If the price drops, the stoploss stays where it was, i.e. 20% below the highest price reached since purchase. You sell if at any time the price falls back to or below your stoploss.

The term "gainlock" is sometimes applied to a stoploss that has been moved up to a level where it is protecting profits. However, the word "stoploss" more accurately describes the aim of this entire exercise. Since any paper profit you have made certainly counts as part of your net worth, you do indeed suffer a loss if your shares fall. This is what a stoploss is there to stop!

1. When should you sell? 2. What is your overall strategy? 3. Selling for passive investors 4. When to take profits as a value investor 5. When to take losses as a value investor 6. Selling for growth investors 7. Mechanical formulas for selling 8. Selling in order to reinvest 9. Stoplosses 10. The argument over stoplosses 11. Limitations of stoplosses 12. Profit warnings 13. Selling for traders 14. William O'Neil's trading system 15. The most important rule of all 16. Emotional problems 17. Conclusion