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Suppose you buy stocks from company FOOBAR at price X. After a while, the price is Y = X * 1.25, so you decide you want to collect that 25% profit. You sell the stocks, cashing out your original X plus a 25% profit. Yay! You made money. But haven't you also put yourself out of the trading business by not having stocks anymore?

If you just want to take profit but also continue investing, you collect the 25% and you are back to having just X to invest. Now stocks from FOOBAR are too expensive for you (current value is Y). What do you do? Do you select another cheaper (pontentially worse) stock just to be able to buy it? You wait until FOOBAR price is X again? (losing time and also maybe the stock is not as attractive now?).

Does this mean stocks are mainly for the long-term-collect-once type of investment? How do short/middle term traders make money, without falling in a diminishing returns type of situation?

Thanks!

  • Suppose you bought stocks with a plan? If you want to take the profit, sell enough stock to do that… is your problem that the maths is difficult? If you want to whatever else, can you explain that? – Robbie Goodwin Oct 1 at 22:33
  • I have deleted a lot of comments that were either answers-in-comments or otherwise not about clarifying the question. – GS - Apologise to Monica Oct 2 at 17:41
11

If the stock offers options, there are some strategies that can be used to lock in the much of the gain. Other than that, you don't have much choice.

In lieu of that, you could sell 20% of the appreciated position, pulling out 25% of the invested capital but this would only book 5% of the gain. It's not a good solution for anything other than lowering cost basis.

If you buy at X and sell at Y which is 25% higher, you have two choices:

  • Wait until your stock drops back to X

  • Find another stock that offers the potential of rising in price. This is what traders do. It's no different than a long term investor who decides that after a large run up in price, the stock is overvalued and redeploys the money (reallocation). Just the time frame is different.

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    This is the answer I thought was best. The thought process about what to sell and when in my opinion is, you act like the $ in the security is still cash, and at the price Y, would you buy it? If Y is too high, then that tells you to sell a large % or all of it. If you think there is still growth at Y, then that tells you to leave a large % or all in the security. Mostly, the main thing you have to do here is not have a memory, because -- and everyone say it with me here -- past performance says nothing about future performance. Constantly evaluate these decisions in the now. – R. Hamilton Oct 1 at 13:55
  • There are many good answers IMHO, but I find this one to be the most concise and simple. – jotadepicas Oct 8 at 14:42
21

You don't have to sell just because the price has gone up 25%.

You sell...

  • if you need the money...
  • because you think that the company share price will not be growing any more or even it will be going down...
  • because you have found another investment that has more potential...
  • because you want to rebalance your investments...
  • because you have to pay a tax bill...

In some of those situations you know exactly where you will be reinvesting the proceeds. In other cases you keep the funds in cash until you pay the bill, or find the next investment.

You sell the stocks, cashing out your original X plus a 25% profit. Yay! You made money. But haven't you also put yourself out of the trading business by not having stocks anymore?

Most people are invested in multiple types of investments, and even if they only have one type of investment they generally are invested in multiple companies. This is diversification. They don't want all their money invested in one company in case they make a bad pick. That means that when they sell that investment they plan on moving the funds into another company, or another investment type.

Regarding that investment that went up 25%. You don't even have to sell all your shares. You can decide to only sell some of them.

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  • Granted you don't "have" to, let's say you "want" to, but you also want to keep trading while also cashing out profits. I think it boils down to find new opportunities you can buy with the capital you have remaining, right? Btw, I don't see how diversification has an impact on this, I mean, X is lower than Y, regardless of how big or small is the overall impact in your portfolio, isn't it? Thanks! – jotadepicas Oct 1 at 12:33
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    Diversification plays a role because selling the investment in one company shouldn't mean all your money is out of the market. The selling all your shares in one company shouldn't take you out of the trading business. – mhoran_psprep Oct 1 at 12:38
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    That's clear, you are not completely out of business, but you are "out of business" for the amount you have cashed out, in that proportion, right? – jotadepicas Oct 1 at 12:45
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    Is there a difference between your first and last bullets? – scohe001 Oct 1 at 14:11
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    @jotadepicas You can't have your cake and eat it too. If you want any of the money you have invested, you're going to have to sell some of it. – glibdud Oct 1 at 14:58
9

I think to get at the heart of the issue, you should realize that if a stock you own has risen, you have already made money whether or not you sell. Your investment returns compound over time, regardless of whether you hold the same stock or switch between different stocks. Every day you continue to hold a stock, it is as if you sold it and then decided to buy it again (ignoring taxes and transaction costs). In fact, this is commonly used as a guideline for when to sell a stock: If you didn't own it, would you buy it today? If not, sell.

Another way to look at this: At every moment, all the investments in the world are competing for your dollars. You chose to buy FOOBAR because you believed its expected return would be better than the alternatives. You would sell it when this is no longer the case (or when your risk tolerance has changed, or you need money to spend, etc.). Typically, there would be another stock that you now like more. (As Jim Cramer says, "There is always a bull market somewhere.") Or occasionally, if you expect stocks to decline broadly, you might judge that the best expected return is in cash.

The point is that you are always trying to maximize returns going forward (based on your beliefs about the market). Tomorrow is another day, and what you happen to own today does not constrain your choice for tomorrow. So there is no reason for "diminishing returns".

Here is a related answer.

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    (I believe this is indeed the confusion the OP faces!) – Fattie Oct 1 at 10:47
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    Thinking you have "made money" before you sell is the biggest mistake made by amateur investors, and the biggest lie that is told every day to clients by (so called) "financial advisors". – alephzero Oct 1 at 13:48
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    @jotadepicas There are a lot of possible strategies, like selling enough shares to pocket X * 0.25 dollars and leaving the rest invested, buying dividend-paying investments, and others. But I think that a big issue here is the simplified example in the question, while helpful for thinking about some elements of investing, is too different from actual investing to illuminate much about the question (or at least do so with much precision). – Upper_Case Oct 1 at 14:46
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    @alephzero Do you want to break it to Warren Buffett that he's not actually a billionaire, or shall I? ;) After all, it's just paper gains in Berkshire Hathaway stock. – nanoman Oct 1 at 17:26
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    @alephzero IMO, the idea that "gains and losses aren't real until you sell" leads to confused thinking as in this other question. – nanoman Oct 1 at 18:20
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Imagine that you're on a train, headed to some place west of where you started. At some point, you realize that you're 300 kilometers west of your starting point. How do you collect those 300 kilometers while still being a train passenger?

Well... you don't. It doesn't work that way. The question doesn't make sense.

If you think that the train is headed where you want to go, you stay on the train. If you want to stay where you are, or you want to visit the shops, you get off the train. If you want to go in a different direction, you get off and board a different train.

There's no need to "collect" the kilometers that you've traveled; that's a totally meaningless concept. (You can convert your "kilometers traveled on the train" into "kilometers traveled on the ground" by briefly getting off the train, but that would accomplish absolutely nothing whatsoever.) And the only reason you would ever want to "still be a train passenger" is because there's a train that's going where you want to go.


Investing is exactly the same way. Everything I said about train travel, I can also say about investing, sentence for sentence. Watch:

Imagine that you have some stock, and you're hoping to grow your wealth. At some point, you realize that the stock is worth 25% more than it was when you bought it. How do you collect that 25% profit while still being invested?

Well... you don't. It doesn't work that way. The question doesn't make sense.

If you think that the stock is still a good investment, you keep your money in it. If you want to just preserve your wealth, or you want to spend your money, you sell the stock. If you think there's a different stock that's a better investment, you sell your stock and buy that stock.

There's no need to "collect" the unrealized gains that you have; that's a totally meaningless concept. (You can convert your "unrealized gains" into "realized gains" by briefly selling your stock, but that would accomplish absolutely nothing whatsoever.) And the only reason you would ever want to "still be invested" is because there's a stock that you think will go where you want to go.

In short, if you want to go where the train is going to go, stay on board, and if you don't, get off.

I've read all the comments you've posted on this page and I think this answer addresses all of them. Let me know if there's something you'd still like to know.

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3

As we know, there are two types of investors in stock market:

  • Investor
  • Trader

Your question pertains to trader. Trader wants to leverage the price increase and make profit out of that. Without trading stocks, he cannot make profit out of the stock price increase. If he considers to hold the stocks and not trade them, then trader, has become investor, who holds for long time.

Assuming, it is the only stock he is holding, and he wants to earn money and still wants to keep capital, some of the below things have to happen:

  • Stock split He can sell the original quantity and make profit and keep the new quantity
  • Bonus shares He can sell bonus shares and make profilt
  • Dividend declared He can sell dividend money and make profit.
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  • What's bonus shares? Thanks! – jotadepicas Oct 1 at 12:48
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    @jotadepicas Bonus Issue is basically a dividend but instead of cash, of shares. – Joe Oct 1 at 16:08
2

If you decide you no longer want a certain stock, you sell it.

If you're a professional trader, you're most likely going to spend (the majority of) this money to buy other stocks.

If you want to use all this money or a portion of it for something else, then you can do that too.

Whether you consider briefly not owning stocks to be "out of the trading business" seems like semantics or technicalities. You wouldn't be out of the business any more than a merchant who sold all their inventory before ordering more. Professional traders most likely won't think that, aside from the fact that they probably own stock in many companies at any given point in time (because diversification is good) and they would rarely, if ever, sell all stocks they own at once.

Regularly withdrawing (as in not reinvesting) all your profit and reinvesting the rest is not a good trading strategy if your main goal is to make money, as your investment would never grow and shrink if you make a loss (which happens quite often in trading). You want to try to keep most of it invested.

The logic behind making money trading stocks goes something like this:

  1. I have $100.
  2. I invest this $100 to buy X shares of company Y.
  3. Company Y does well and the share price increases by 25%.
  4. I sell the shares of company Y and I now have $125.
  5. I invest this $125 to buy W shares of company Z.
  6. Company Z does well and the share price increases by 20%.
  7. I sell the shares of company Z and I now have $150.
  8. I keep repeating these steps, while also combining this with buying and selling other shares.

Note that $150 is more than 25% of $100 plus 20% of $100 (which is only $145), because you also got 20% on the 25%. That's compound interest for you. It's fairly little in this case, but it can snowball quite quickly if you keep multiplying those percentages with each other.

There's the obvious disclaimer that you could also lose a huge percentage of what you invested if "increases by 25%" turns out to be "decreases by a whole lot" instead. But the above is the basic idea behind making money.

The above logic is the same regardless of whether you're holding a stock for a few milliseconds or a few years. Although there may be trading costs involved which would affect how much you walk away with after selling some shares.

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  • I get what you say. The part that is a little counter-intuitive to me is "Regularly withdrawing all your profit and reinvesting the rest is not a good trading strategy if your main goal is to make money". I get it, but on the other hand, to actually "make" money, you have to eventually withdraw, hence, lowering the amount you have invested and generating profit for you. If you keep all your money invested and never withdraw, you are not actually making any money, are you? (I didn't refer to withdraw "all", I referred to withdraw "some" btw). Thanks! – jotadepicas Oct 1 at 14:45
  • @jotadepicas and s/he is saying that if the stock goes up a lot, you want to leave your money in the stock, don't change anything, in fact sell all your possessions and buy the stock with that money too. That is, if the stock is going to go up a lot. Which you don't actually know. – user253751 Oct 1 at 15:10
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    @jotadepicas The key word there is "eventually". When it comes to investments, you should keep as much money as possible invested now (minus your safety net) so you have all that money gaining interest for you, and that interest gaining interest, and the interest on that interest gaining interest, and so on. When you do eventually withdraw it, you're going to get a whole lot more than what you would've gotten from withdrawing frequently (assuming you make a profit, which should be the goal, but isn't guaranteed). Of course if you want e.g. a monthly income, that's a different investment goal. – NotThatGuy Oct 1 at 18:51
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After you sell FOOBAR, you're essentially back at square one. You have up to $Y to invest, you do some research, and you invest it (or a portion of it, e.g. just $X) in some company (or other type of security) you expect to make money for you in the future. What you were invested in in the past is irrelevant.

Ideally you would have done this research before selling, so you can immediately put the money back to work. But if you're in a hurry to lock in your gains (maybe you think FOOBAR is going to drop in value soon, or you need the cash right away) you can put the proceeds of the sale in the bank and then worry about where to invest next.

You don't necessarily have to sell all of your FOOBAR stock. If you just want the 25% profit, sell 20% of your shares. Then you'll be back to having $X invested in FOOBAR.

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  • Your answer makes me think about "What you were invested in in the past is irrelevant.". I think I have a bias to think this: "FOOBAR is a good stock with good performance, I want to get profit from it while still leaving capital invested, because it's a good stock". What I found counter-intuitive was, if it's a good stock and you do that, you de-capitalize from it. But if you don't, you cannot get the profits until is not such a good stock anymore. – jotadepicas Oct 1 at 14:41
  • If you need the cash, you have to sell something, so you can't also stay invested. – Barmar Oct 1 at 14:44
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    More to the point: what you're asking now goes into the decision of whether to sell the stock in the first place. The question you originally posed presumes you're going to sell the stock, and asks what to do afterward. Once you've sold the stock, it no longer matters what you were invested in before. – Barmar Oct 1 at 14:49
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What I personally do (although I'm definitely a novice investor) is have a goal of doubling my initial investment. Once I do so, I sell half of my shares, and typically reinvest that portion in another company.

For example, say I bought 100 shares of FOOBAR for $20 each, or $2,000 total investment. If it hits $40, I will sell 50 shares to get back my initial investment of $2,000, while leaving the remaining 50 shares to hopefully continue earning a profit. At this point anything I can sell the remaining shares for is pure profit. If the price hits $80 I'll sell another 25 shares.

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How do you take profit from stock trading while keeping capital invested?

For a single stock the answer is a definitive no. You cannot keep the stock and sell it at the same time. It gets even worth as it is the same for any asset that is "gaining value", like real estate. You have to sell to realize the gain and can the invest the money or consume it. To put it blunt: you are not rich if you do not have the money

I still remember the dotcom bubble and the stories about apprentices that happend to become "stock millionaires"... and ended up with basically nothing. The problem is, of course you can always sell but if you expect the market to be rising, you would miss out the gains of next week.

The only thing you can do is to rebalance your portfolio if you expect FOOBAR to perform badly in the future. Selling parts of your investment (e.g. 20%) is only a variant of that.

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