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Five Rules for Buying Stocks

Stocks in this article: AMZN BRK WFC

5 - Buy Stocks with a Clear Plan to Sell

You would think it goes without saying that the purpose of buying a stock is to sell it for a profit, but many investors run out and buy "great stocks" without a clear plan on what their investment goal is and when they want to sell. This can be brutal on your portfolio.

Because after all, what is a "great stock?" Trendy footwear manufacturer Crocs (CROX) was a great stock to buy in early 2007 at $23 a share -- but only if you sold by October of that same year when prices were pushing $70, locking in your 200% gain.

If you held on for much longer, things don't look as cheery. Crocs stock is currently around $10. Whether or not CROX was a good or a bad stock depends on your investing horizon and what you expected to get out of the stock.

But short-term traders who get greedy and refuse to sell can be just as bad as buy-and-hold investors panicking and selling too quickly. Many traders who sold off their stock when the market crashed in March 2009 not only locked in historic low valuations for the equities they sold, they missed out on one of the biggest rallies in the market's history in mid-2009.

Some big-name stocks like Ford (F - Get Report), Colgate-Palmolive (CL - Get Report) and General Mills (GIS - Get Report) are actually trading higher now than they were before the market's meltdown two years ago.

Whatever your tactics -- simple trading strategies or not -- keep your goals clearly in mind before making any purchase. Set a reasonable price target or holding time for any asset, and use this investment strategy to color your decision. Simply knowing a company is a "great stock" provides little consolation if you sell your shares too early or too late to actually make any money.

At the time of publication, Jeff Reeves did not have a position in any of the stocks mentioned.

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