A common question is when to sell a stock. Is it when it has risen 10% over the purchase price?

Most would expect a “Yes, that’s good time to sell”, or “No, hold on to them for a while”.

But, DividendVault.com teaches members to be their own fund managers who build and manage their investment portfolios independently.

Independent thinking and ownership of all investment decisions is encouraged, and it is a freeing way of investing.

The above question reflects a couple of things worth highlighting for educational purposes.

This question is about trading, not investing

There is a distinction between trading and investing.

Traders trade for fast money. Investors accumulate shares in good businesses for sustainable long-term wealth.

The question of when best to sell a stock indicates a focus on making money. The person is looking at stock price movements, not ownership of businesses.

This question is on stock trading and not stock investing because a trader buys low to sell high or buys high to sell even higher.

Ask yourself the purpose of buying that particular stock

People should be purposeful when investing. They must understand the whys of what they are doing and know what they ultimately want to achieve. Each person’s objectives and preferences differ.

If you have a plan for what you would like to achieve in the next one, five or 10 years, you will most likely know which stocks to buy, when you should buy them and what your portfolio will look like in the future.

Without a plan, you will be chasing the wind, asking for stock tips, comments, opinions, advice and recommendations. What you need is not tips, but wisdom, a plan and a system for investing.

So back to the question of the original purpose of buying a particular stock. Was the market down and prices low? Were there other reasons you chose it?

It would be helpful to reflect and list your answers.

But, if by now you say, “Bro, all I want is to know what to do with these stocks. Keep or sell? Why are you not answering me?”, you might have just missed an opportunity to learn more about yourself and investing.

So, here is some homework. Think about why you bought what you did and your objectives will reveal what you should do with the stocks.

When is the right time to sell or keep?

Ideally, all stocks should be bought with a plan already in place. The logic is similar to having a blueprint before building a house. It tells you what your house will look like after building it.

Investors who prefer to accumulate stocks for the long term look for good stocks that deliver consistent growth in sales, earnings and cash flow, and if the prices are undervalued.

‘I always sell at the wrong time’

Many people buy stocks, hoping they will go up. A stock is deemed a good “investment” if the price rises higher and faster. This has attracted many people into stock trading and speculating because they want fast money.

It is a fallacy to believe stocks will always go up. It is more realistic to expect prices to go up, down or even sideways.

The stock market has been volatile, still is, and will be in the future. So, why not accept it and embrace it?

If you buy stocks in the hope they will go up and they do not, you will be disappointed and decide that stock investing is risky.

To prepare for all eventualities, before buying a stock, try answering these questions:

• Why do you want to buy the stock?
• Would you like to own the stock for the long term or forever?
• If you buy it for RM10 and it goes up to RM11 and above, what would you do?
• If you buy it for RM10 and it stays at around RM10, what would you do?
• If you buy it for RM10 and it drops to RM9 and below, what would you do?

Trading profit versus dividend income

Many are delighted to buy a stock at RM10 and sell it for RM11, for a trading gain of 10%. The person who earns 10% in 10 minutes is often considered a better investor than one who earns this in one year.

But some investors do not actively buy and sell stocks. They make few, but calculated, transactions on the stock market. These investments deliver regular dividend income into the brokerage account without activity on their part.

This is common among dividend investors worldwide and anyone with logic and primary school mathematics can do this, it is not rocket science.

So, why not focus on selling stocks for profit? It is not necessary to sell stocks if they are good assets. Why kill the goose that lays the golden egg each day?

Conclusion: Are you trading or investing?

It is helpful to understand that stock trading is different from investing. The whole mindset, skill set and how people approach stocks is different from one another.

It is incorrect to think a stock investor is a good trader who can predict markets and use technical analysis tools to trade for a quick profit.

Stock investors are businesspeople who look for shares in good businesses if their prices make business sense.

This article first appeared in kclau.com

Ian Tai is a financial content machine, dividend investor and author of over 450 articles on finance featured in KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’, and ‘Small Cap Asia’ in Singapore. He is a regular host and presenter of a weekly financial webinar with KCLau.com.