Today, you’ll learn how to reinvest stock gains.
- Reinvest only 50% of the gains
- Add/buy more shares
- Withdraw stock gains
You can reinvest stock gains by reinvesting only 50% of the profits and withdrawing the rest, adding more shares, or withdrawing all gains. Withdrawing stock gains helps in reducing the losses because it is not available for trading anymore.
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 primary purpose of trading.
Purpose must guide traders how to reinvest stock profits or gains.
The trader can be near retirement in which reinvestment makes little sense.
What makes sense is to withdraw all gains.
To enjoy profits is the 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
Reinvesting profits from stocks is a good way to increase the account size. However, as the account grows, there is a risk that the trade size may also increase, which also increases the losses.
The temptation to trade big positions will always be there, and the trader may not control himself.
Big positions mean 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 money earned 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 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 are usually subject to higher taxes for short-term trading.
Not knowing what to do may create problems.
Trading stocks is not that simple, and most trading courses do not even discuss stock selling taxes.
1. Reinvest only 50% of the stock gains
Stock trading is a high-risk investment activity.
The risk will become bigger when the trader becomes profitable.
Profitability increases people’s 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.
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 want to earn a living trading stock.
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 improve in almost everything 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/Buy more shares
Stock gains can be a great resource to buy additional shares. However, this is the most boring and most challenging way to reinvest profits.
Reinvesting profits into more shares hits the emotions of the traders, instead of withdrawing cash, while working so hard.
Trading stocks requires hard work for selecting and buying stocks, and receiving profits from investing or trading.
Trading is risky, so profits must return to the traders bank account when the capital doubles.
However, waiting for the account to double requires too much patience.
Patience often runs out, and the trader may not reach the original goal.
Reaching a profit target usually requires 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.
A losing mindset is bad, however improved when profits would go to the bank.
The experience of having actual cash usually makes people happy and increases wealth.
The excess cash is also available for investments on fix income assets such as time deposits and bonds.
Then, income from time deposits can also add more buying power if added to trading capital.
3. Withdraw all stock gains
Professional traders consider stock trading as a business.
As a business, all aspects of the operations are with specific details, such as trade sizes, profits, maximum losses and the number of trades per month.
Withdrawing profits is an efficient utilization of profits by allocating to other securities and determining the set-up for the next 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 because of its volatility, which is three 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.
How to reinvest stock profits? As a minimum, reinvest only half of the profits to avoid big losses due to increased trade value resulting from the increase of the trading account.
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