The intent of purchasing a security (stock or mutual fund) is for the value of the security to increase. Although, the value of the security may remain stagnant for days, weeks, or months or it could decrease in value slowly or even quickly. Only you can decide whether to sell a declining security or wait/hope for it to increase in value. Your decision should be based on the stability and growth potential of the company or the fund manager. Occurrences exist in which a security decreases in value by over 10% one day for no reason associated with the performance of the company or fund manager only to gain over 15% in the next day or week. If you remained calm and didn't sell the security, then the value of your portfolio would have increased. If you panicked and sold the security at a loss, then you would have missed out on the opportunity to increase the value of your portfolio.

     A technique for profiting from the previous example is to purchase more shares of the security when it decreases in value as opposed to attempting to time the market. You will thus earn more money when buying at a lower price, holding the security as it's value hopefully returns to the original purchase price, allowing you to sell high once the security reaches the price before the decrease occurred. You will then have the option of selling those shares for an immediate gain or holding them for the potential of even more gain. The choice is again dependent upon the stability and growth potential of the company or the fund manager.

     If an attempt to time the market is desired, then the value of the stock must decrease a certain amount to account for the capital gains tax associated with the sale of the stock. Otherwise, you will loss money due to the payment of capital gains taxes. Keep in mind the expenses for purchasing and selling a stock are tax deductible and are thus subtracted from the capital gains. The necessary decrease in the value of the stock can be calculated by subtracting the capital gains tax (excluding the expenses for selling and buying the stock) from the investment value after the sale, then dividing the value by the number of shares sold. The result will be the price the stock must reach in order for the loss associated with the capital gains tax to be recovered. Otherwise the transactions will result in less money than if you did not initially sell the stock. For example: An initial investment of $1,500 for purchasing 20 shares of a stock at $75 each is sold at $100 each for an investment value of $2,000. Also, assume the commission charge is $10 for selling and $10 for purchasing the stock (total commission charge of $20) and the tax bracket is 28%. The resulting capital gains tax will be $134.4 [($2,000 - $1,500 - $20) * 28%]. The price of the stock will thus need to decrease to at least $93.28 [($2,000 - $134.40) / 20] to recover the capital gains tax if you intend to time the stock performance and purchase more shares.

     A technique for minimizing the loss from the sale of a security whose value has decreased is to sell the security at a loss with the intent of declaring the loss on your federal income taxes, then repurchasing the same security at the lower price. Although, one problem exists with implementing such an example. The sale must not violate the wash sale rule. The wash sale rule indicates a capital loss from the sale of a security cannot be declared if the same security is repurchased within 30 days (refer to IRS Publication 550 - Investment Income and Expenses at http://www.irs.gov for further details). Therefore wait to repurchase the security until the 31st day after the sale of the security to ensure a wash sale does not occur.

     The sale of a stock at a specific value can be established by declaring a stop loss. The stop loss is a value that must be reached for the sale of a stock to occur. The advantage of establishing a stop loss is that you can minimize the losses associated with a stock whose value is decreasing greatly.

     A stock cannot only be purchased with the intent of its value to increase, but it can also be purchased with the intent of its value to decrease. Going long refers to the intent for the value of a stock to increase while going short refers to the intent for the value of a stock to decrease. Shorting a stock is the same as going long except in the opposite direction. Instead of purchasing a stock at a lower price with the intent of selling the stock at a higher price, the stock is first sold at a higher price with the intent of later purchasing at a lower price. Shorting a stock requires a larger amount of money in an account with a brokerage permitting such a transaction to occur.


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