Today, you’ll learn how to reinvest stock gains.
- Take 50% of the gains
- Add more shares
- Withdraw stock gains
You can reinvest stock gains by taking 50% of the profits, adding more shares, or withdrawing all gains.
It all depends upon the trading objectives or goals.
The goal can be to grow the capital fast or make a living with just stock trading.
Making a living requires taking money from the account every month.
So, every month traders should withdraw at least 50% of the gain.
The real question is what are the main purpose of trading.
Well, the purpose must be defined first before choosing the best way to reinvest stock gains.
Choosing what to do needs an understanding about the current situation of the trader.
The trader can be near retirement in which reinvestment does not make sense.
It makes sense to withdraw all gains to be able to enjoy the profits.
To enjoy profits is the ultimate goal, but young traders need to leave some amounts in account to grow the capital.
While growing the account there are three risks that may arise if there are no withdrawals of profits.
- Broker risk
The temptation to trade big positions will always be there and the trader may not be able to control it.
Big positions means big profits and losses.
The losses can wipe out the account because the trades are getting larger and larger.
What are stock gains?
Stock gains are derived from the appreciation or depreciation of the stock price and receipt of cash dividends.
The gains can be short or long-term which are taxed differently.
Short-term gains have a higher taxes which are based on marginal taxes.
Marginal taxes could reach to up to 37% depending on the amount of income made when selling the stocks.
There are ways traders can save taxes in trading by watching this video.
The video will teach people how to be smart on stocks gains.
Stock gains can be taxed higher if the traders do not know what they are doing.
Not knowing what to do creates a lot of problems when trading stocks.
Trading stocks is not that simple, and most trading courses do not even discuss stock selling taxes.
1. Take 50% of the stock gain
Stock trading is a high risk investment activities.
The risk will become bigger when the trader becomes profitable.
Profitability increases peoples confidence when trading stocks.
When confidence is high, the temptation to trade bigger sizes is also high.
Bigger trade sizes to traders means bigger risks.
The risk is bigger because the losses are getting bigger also.
So, it is important to withdraw at least 50% of the profits to avoid being tempted.
50% withdrawal is a good rate for short-term traders.
Short-term traders can be day or swing traders who wants to earn a living trading stocks.
Day traders and swing traders can still grow their accounts yet still make money.
Growing the trading account also grows profits potential.
The growth of profits also increases the traders’ happiness because of the earnings that are actually taken from the account.
The happiness while trading also improves the trading psychology of the trader.
Trading psychology should be positive for traders to be profitable in the long-term.
Being positive means traders can keep following the trading plan because they are actually making money.
Making money while trading is rewarding.
When being rewarded, people tend to improve in almost everything that they do.
Everything they do seems to work out while trading stocks.
Trading stocks in this manner is what they call “Trading in the Zone.”
2. Add more shares
Stock gains can be used to buy additional shares. This is the most boring and most challenging way to reinvest profits.
Reinvesting profits this way hits the trading psychology of the traders.
It hits the psychology because of not withdrawing cash while working so hard.
Hard work is required to select stocks to buy to receive profits from investing or trading.
Trading is risky and some people recommend that stock gains are to be withdrawn when the capital is doubled.
However, waiting for the account to double requires too much patience.
Patience often runs out and the trader may not be able to reach that goal.
Reaching goals requires in trading a reliable trading system and self-motivation.
Self-motivation means following the plan despite consecutive losses.
Consecutive losses can affect how traders think about trading.
The thinking of not making money can be avoided by experiencing profits first hand.
The experience of having actual cash makes people happy and increase their wealth.
The cash can be placed in fix income assets such as time deposits and bonds.
Income from time deposits can also be use for additional trading capital.
3. Withdraw all stock gains
Professional traders consider stock trading as a business.
As a business, all aspects of the operations are already established.
For example, trade sizes, maximum losses per month, and the number of trades are already determined.
Since trade sizes and the number of trades are already fixed, stock gains are not utilized efficiently.
To efficiently utilize the stock gains, it is better to withdraw the profits.
The profits can be allocated in other securities or can be the basis of the trade sizes in the following year.
Allocation for stocks should also only be 30% of the total capital because it is riskier than other investment tools. (source)
It is riskier due to its 3 times volatility in the market.
The higher volatility in stocks makes trading difficult to master.
Because it is difficult to master, it is important to withdraw all stock gains.
Withdrawing everything also allows evaluation of the strategy being used.