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Intelligent Investing

Some tips when speculating in high-flying stocks

Merry Mart was one of the most noteworthy performers in the stock market last week. As of Friday, the stock was up by 195 percent compared to its IPO price, allowing lucky subscribers to its IPO to almost triple their initial capital. Those who were lucky enough to sell their shares on Thursday’s high of P4.50 more than quadrupled their money.

The opportunity to speculate and make a lot of money quickly makes the stock market extremely attractive to a lot of people. This is especially true in today’s environment where interest rates are so low.

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Although speculating in stocks can be very profitable, it can also be very dangerous. For example, not all IPOs are successful. Some IPOs in the past even closed lower than their IPO prices the very first day they were listed.

When speculating in high-flying stocks, here are some tips that will hopefully limit your losses when you make a wrong bet.

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Lock in your gains. To all the subscribers of Merry Mart IPO, congratulations! If you sold your stocks last week, you may consider locking in or withdrawing some of your gains and using your initial capital to speculate on the next high-flying stock. If you were lucky enough to sell at more than double the IPO price, you may consider withdrawing your initial capital and reinvesting the gains.

Limit your investment. If you plan to continue speculating in high-flying stocks, limit the size of your investment to an amount that you can afford to lose. This could be equivalent to the price of a spur of the moment beach vacation or an expensive designer bag or gadget that you bought just because it was on sale. By doing this, you won’t be significantly affected even if you make a mistake and the stock you bought goes down in price.

Even if you are rich and can afford to lose a lot, you still need to limit the size of your investment. This is because the liquidity of high-flying stocks usually dries up very quickly, especially when prices are falling. This makes it difficult to sell them at a good price when you want to exit.

Have a plan on when to sell. When buying high-flying stocks, have a plan on when to sell or cut losses if prices weaken. High-flying stocks can go down as fast as they can go up.

Have a plan on when to sell if prices go up. Your selling price can be based on your own target (for example, up 10 percent from purchase price). It can also be based on specific technical indicators such as the break of the 20-day moving average. If the high-flying stock you bought is very strong, you can consider selling in tranches. For example, in the case of Merry Mart, you can choose to sell a third of your position at last Friday’s closing price of P2.95 and just ride the balance. That way, you have already taken out your initial capital and just speculate using your gain which is less painful to lose if the stock doesn’t continue to go up.

Don’t fall in love. Although many people buy high-flying stocks for the opportunity to make quick gains, many end up falling in love with their stocks and refuse to sell even when prices go down. They usually cite the reasons for the stock’s strong performance such as the company’s plans to engage in a lucrative business and huge potential profits that can be earned if plans materialize. From short-term traders, they turn into long term investors.

However, nobody knows for sure if these companies can execute their plans to engage in very lucrative businesses. Even if they do, the profits are usually not as good as initially expected. Because of this, it is difficult to sustain high-flying stocks’ strong performance and people who fall in love with these stocks get stuck with permanent losses that can be substantial. INQ

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