In this situation, it might be prudent to sell some of your shares and book part of the profits, because of the negative impact on your portfolio if the stock retraced most of its advance. If, after three months, that biotech stock quadrupled on promising trial results while the rest of your portfolio is unchanged, it would now account for 50% of your portfolio. For example, if you bought 1,000 shares of a biotech stock at $5 per share when your total portfolio was worth $25,000, that stock constituted 20% of your portfolio. The more that a stock’s short-term gains contribute to your overall portfolio, the more critical the sell decision. In such cases, the investor would be well-served by doing some research to try and ascertain the reason for the stock gains, and depending on the findings, either sell the full position or sell part of the position and put in a stop order to sell the balance if it trades below a certain price. But in other cases, the price may have posted exponential gains purely on speculation, or due to other reasons such as takeover rumors or a short squeeze.
In some cases, the price gains may be justified by the company’s underlying fundamentals (for example, its sales and/or earnings may be growing faster than investors’ expectations). When the price rises dramatically: Selling a stock merely because it has risen dramatically in price isn’t always the best course of action.And to avoid making the same mistake in the future, resist the temptation to chase hot stocks that are running on fumes, as they may burn you financially. The best course of action in this case is to sell the stock, even if it means taking a small loss on the trade. But as soon as you do so, you realize that you’ve probably made a mistake. You’ve watched this stock-or more likely, a meme stock-make phenomenal gains on a daily basis, so you finally decide to suspend your disbelief and recklessly put in a sizable buy order for the stock. When the initial buying decision was a mistake: Most experienced investors may have encountered this situation at some point.
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