PDF Decision Making as to Keep the Stock or Sell the Given Stock

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There should be a good appetite for investors to use options as a hedging tool. Options trading requires you to learn a new vocabulary of terms like puts, calls and strike prices, which may lead you to believe these assets are riskier than stocks. That notion is overstated, especially because investors can let an option expire and incur no further financial obligation other than the premium paid and associated trading costs, says Wade Guenther, a portfolio manager at Horizons ETFs Management.

Buying a put option will help mitigate potential losses if the value of a stock you own goes down.

A New Watchlist

Options trading requires a more hands-on approach than investing in stocks. You can set alerts through your online broker. The more you trade, the higher your costs. Another downside of options trading is the related costs, which generally are much higher than for stocks. Deciding whether stocks or options are better for you is entirely a personal decision, based on your investing style.

Beginner investors and those who prefer simplicity generally will stick to stocks for their straightforward nature. Those who favor an active investment approach and love to watch the market may find options appealing. This is the point when you can exercise your right to purchase the shares. Leave the company before then, and you'll likely forfeit any unvested options.

Taxation of stock options depends on what kind you have, and how long you hold those options before selling them. There are incentive stock options which must meet specific rules under the tax code and non-qualified stock options pretty much everything that isn't an ISO.

Five Basics You Should Definitely Know About The Stock Market

For non-qualified stock options, generally speaking, you pay taxes when you exercise those options, based on the difference between the so-called exercise price — the amount you were promised you could buy the stock for — and the fair market value at that time. That difference is taxed as ordinary income and subject to payroll taxes, and gives you an adjusted taxable basis of that fair market value.

Then when you sell the shares , you'll have either a short- or long-term capital gain or loss based on the difference between that adjusted basis and the sale price. For short-term gains, you pay your ordinary income tax rate. For long-term gains, the tax rate is either zero percent, 15 percent or 20 percent, depending on your annual income.

Restricted stock is taxed differently from stock options and it can get even more complicated. Generally speaking, however, when those shares vest, it is considered compensation and you are taxed at your ordinary income tax rate.

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If you hold on to them for a while, you would incur capital gains taxes for any difference between the vested price and what you sold it for. Tax is typically withheld by your employer in both cases, although the methods are slightly different. Before you do much of anything with your company stock, you should put it in the context of your full financial picture. Many experts recommend having no more than 10 percent or 20 percent of your assets in any one investment.

The idea is that if one specific stock or asset tanks, it won't entirely upend your portfolio. More importantly, though, you should consider your financial goals and how owning your company's stock fits into that. For instance, if one of your goals is to have more cash reserves, maybe selling some of your shares to pad your cash funds is a good idea. Or, perhaps you're saving for retirement or financial independence and investing is stocks is part of how you plan to get there.

McDonough at Schwab also said too many employees are winging it. The Schwab survey showed that two big reasons for employees to sell were because they needed cash 35 percent , or wanted to make a large purchase 28 percent. More from Personal Finance: MeToo spurs investors to move money to companies that support women Here's what you should really do with your cash amid market volatility SEC wants advisors to come clean about high-fee fund shares.

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  6. You may need to sell for an emergency, to transition your portfolio to focus more on fixed income or even for routine rebalancing. It all boils down to this: how do you identify the right time? Smart investors need to find a way to separate emotions from their investment decisions. To do that you need to know why you bought a stock in the first place: whether it was for growth, as a hedge against inflation or for income.

    Stock-picking takes time and discipline, and is not for everyone. Ask yourself one simple question, says Heath: would you buy it now?

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    Most people get caught up in how well a stock has done or to try to avoid selling at a loss, while ignoring the elephant in the room: whether the company is still a good investment. Investors make mistakes, and it takes courage to admit that. Anyone who bought and held Nortel Networks learned this lesson the hard way.

    Patricia Price knows all about the ups and downs of investing.

    #2: Investing in stocks comes with substantial risk, especially in the short term.

    Especially the downs. Poseidon Concepts is a fresher painful memory. Shares of the oil and gas service company fell off a cliff when it lowered its earnings guidance in November Losses like those can inflict serious damage to your portfolio. Suddenly your portfolio returned only 2. But how do you spot them? The main thing Gibson looks to is changes in return on equity ROE , which measures how much profit a company generates with the money shareholders have invested. He then looks at how the current growth compares to the average growth over four quarters to account for seasonality and measures the standard deviation.

    A company with a negative ROE change of 0. Growth, value and income investors all have their own viewpoints on when to buy a stock. Value investors tend to favour lower than average price-to-earnings or price-to-book ratios and high dividend yields. Growth investors hunt for companies with earnings that are expected to grow at a faster rate than their industry or overall market.

    And dividend investors look for stable businesses that have high yields and sustainable payout ratios. Heath is inclined to look at the price-to-earnings multiple and compare it to the rest of the market and the sector. Canadian banks, for example, typically trade around 10 times earnings.