Follow The Rules

How difficult can it be to buy low and sell high? For many of us, it's next to impossible. It seems that lots of folks (your brother-in-law, your golf buddy, even your broker) can tell you when to buy a stock, but few can tell you when to sell. See if this sounds familiar: You buy shares in a stock you like, and the price begins to rise. It continues to rise until you have a profit of more than 20 percent. You're now faced with a classic dilemma: Do you stay or do you go? Unfortunately, no one has a crystal ball. You may have a pharmaceutical company with the cure for cancer on your hands--or maybe it's just a rash. There's no way to know for sure.

One possible strategy? When buying, set a target price at which you'd be happy to sell. When your shares get there, re-evaluate your decision. If you'd buy the stock anew at the higher price, there may still be some room left for more appreciation. Consider buying puts (options to sell) or entering a stop-loss order (an order to close at a set price) to protect your profit. If you sell, don't look back unless the price falls to a point where you want to pick it up again.

This article was originally published in the January 2000 print edition of Entrepreneur with the headline: Follow The Rules.