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There’s nothing worse than getting stuck holding a lame stock.
But you don’t have to deal with the emotional pain caused by the meltdown of one of your investments.
If you learn the two simple market secrets I’m about to reveal today, you can protect your brokerage account from big losses. I’ll also show you how use these tips to spot a failing investment before you buy shares.
Listen, I know how easy it is to get caught up in the story of an exciting company. In fact, nearly every person who has invested a dollar in the stock market has bet on an intriguing story. There are plenty of compelling businesses out there.
However, we all know that most of these stories don’t pan out. Don’t feel bad. We’ve all laid money on a bold speculation that delivered terrible returns.
Unfortunately, losing money on what you thought was a sure thing can be traumatic. You’ll find yourself wondering why it all went wrong. You might even want out of the market for good.
But the two market secrets I’m revealing today will hopefully put an end to your uncertainty. They don’t require an advanced knowledge of economics or finance. And you can apply the tips to virtually any investing situation.
Here’s what you need to know…
Secret No. 1: A stock can become “detached” from the company it represents.
A company and its stock are two totally different things. What this means is the share price can crash even if the company in question is releasing favorable news or impressive earnings.
A sharp decline in share price on “good news” is one of the most gut-wrenching situations you’ll experience when investing. It’s frustrating. And it can cause you to think irrationally.
There are countless reasons the stock of a seemingly good company can drop. The company could simply be too early along the development curve to attract more investors. Maybe the investing public has yet to grasp the company’s potential. Or maybe a big fund is liquidating its shares. Any of these situations can drive down the share price no matter how good recent news has been for the stock.
The truth is, promising companies can have bad weeks or even bad years. You have to prepare for the possibility that your idea might not translate to an obvious investment to the average speculator.
Don’t believe me? Just at Apple’s performance from late 2015 until early 2016:
Apple going out of business? Nope. But that’s didn’t stop its shares from dropping 25% in just 12 months. Apple was still the same tech giant with more than $200 billion in cash on its books. But that’s cold comfort for anyone who had to ride the stock lower when it fell out of favor two years ago.
This brings us to the second market secret you need to remember…
Secret No.2: Strong selling usually won’t abruptly stop and turn into buying.
This is one of the most important investing lessons you’ll ever learn.
If the market collectively decides to sell a stock for any reason, the selling is likely to continue. Period. I don’t care if the stock is selling off due to a rogue analyst chopping the company to bits or a clueless blogger trying to get his name out there by bashing random companies.
I know it’s tempting to talk yourself into holding a stock that just took a punch to the gut. But nine times out of ten, this is suicidal behavior. Rarely will you see a stock reverse course and move higher immediately following a strong selloff.
Investors and traders won’t want to buy a stock that’s diving headfirst into a strong downtrend because they think they’ll be able to get it cheaper if they wait.
Think about it. Would you buy a stock that’s dropping every single day?
I didn’t think so…
When it comes to both situations we’ve discussed today, it’s important to identify when sellers are taking control. If the price starts to move lower on high volume, you must act immediately to preserve your capital. After all, you can always wait and buy shares at a lower price if you still believe in the company.
That’s a much better plan than going broke chasing a losing stock.
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