investors often struggle with cutting losses as they are still harbouring hope of a price recovery. Understandably, it is hard to stomach the truth that we have made the wrong judgment at entering the stock earlier and cutting losses is tantamount to admitting we were wrong. however, setting a stop loss price helps us to make a decision that is not influenced by our emotions triggered by the price movement. A good rule of thumb is to let go once the stock price has dipped more than 10% below your purchase price. Remember that holding on to the stock in the hope of recovering your capital incurs cost as well, due to the time value of money.
As for setting a price to realize your profit, there are several considerations: 1) where are you planning to set aside the money you get from selling the stock? if you are simply selling to sleep well at night, sure! there’s nothing wrong with that but you may be forgoing an opportunity for your money to work harder for you. 2) how comfortable are you with taking a 60% risk of an additional 5% price increase? the numbers here are arbitary but the point is that the risk you may be taking to sell at the highest consensus price target may not be worthwhile for the expected additional returns. 3) what is your investment objective? did you buy the stock to offset the effects of inflation on your hard earned money or are you betting on it for a windfall? this can influence the profit margin you would be satisfied with before you may be willing to let go of the stock. 4) has the reasons that drove you to buy this stock changed? if yes, you may want to reassess the price at which you would want to sell the stock. A reassessment is recommended on a quarterly basis at the very least. look at the latest company guidance, check for recent insider stock purchase or sale made, evaluate the competitive environment in which the company is operating. these would all give you clues on the company’s expected performance in subsequent quarters/years.
ultimately, the decision of when to cut loss or sell a profitable stock lies with your own risk return appetite. whatever you choose to do, make sure it’s a decision you can live with and not regret.