Stock Market Basics

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Knowing When to Sell Stock

Go Figure

Trading stock occurs when you execute a buy or sell order, either with a broker or online, and the broker sends a message to the New York Stock Exchange for execution of the trade.

Anyone who's got money in the stock market these days has been through some trying times lately. After the longest period ever of sustained gains, the market is behaving as moodily as a teenaged girl with no date for the dance.

It's tempting, at times like these, to unload your stocks and put your money back into your savings account. You shouldn't, however, be in a hurry to sell stock that you feel is not performing as well as it should. Give it some time to see if it's going to bounce back. If the entire market is in a slump, chances are that your stocks will be slumping along with it.

The one piece of advice a financial advisor will give when the market dips is to not panic. In some ways, investors are like poker players. Even when the game isn't going the way they'd like it to, they've got to sit tight, stay cool, and hang on to their cards (or stocks).

That's not to say, however, that there is never a reason to sell stocks. If you have stocks that have increased in value, and you want or need money for a good reason, then selling the stock is a reasonable thing to do.

If the stock you own turns out to be a big loser, it also makes sense to get rid of it. Be sure, though, that the stock really is bad, not just stock that's not doing well at the moment. There are investor services that can tell you how your stocks are doing, and why, or you can check out a periodical such as Investors Business Daily. Two investor services you can access on the Internet are Moody's Investor Service at www.moodys.com, and the Value Line's Investment Survey at www.valueline.com.

If you think the price of your stock is as high as it's going to go, it's a good idea to sell it before the price begins to drop. Predicting if your stock has hit its peak requires that you conduct fundamental analysis. Fundamental analysis is a system that evaluates a company's overall condition, based on various criteria that measure the health of the company.

You shouldn't sell stock simply because you're bored and want something that's more exciting. Nor should you sell because you're nervous about the overall condition of the stock market. Unless you're only months away from retirement and are going to need the money you have invested, hang in there, and trust that better days are ahead.

If you do sell stock, you'll need to consider the capital gains or losses that you may incur. Naturally, we all hope to sell our stock for more than we paid for it. If you hold an investment for less than one year, however, you may pay big taxes on your profits. Gains or losses from an investment of less than one year are considered short term. Short-term gains and losses are netted against each other, and short-term gains are taxed at your regular tax rate. If you're in the 28-percent tax bracket, you'll have to pay 28 percent on your gains. As you can see, short-term gains are expensive.

If you hold an investment for more than a year, the gain or loss is considered long-term. Long-term gains and losses are netted against each other, too, but the tax on them isn't quite as hefty as with short-term gains. If you're in a 15 percent tax bracket, net long-term capital gains are taxed at 10 percent. If you're in the 28 percent or greater bracket, your capital gains are taxed at 20 percent. This tax advantage makes it desirable to hold assets for more than a year, particularly if you're in a higher tax bracket.

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Excerpted from The Complete Idiot's Guide to Personal Finance in Your 40s and 50s © 2002 by Sarah Young Fisher and Susan Shelly. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

To order this book visit the Idiot's Guide web site or call 1-800-253-6476.

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