Investor Toolkit: Our stock trading tips on how to respond to bad news about a stock you hold

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific stock trading tips on the fundamentals of successful investing. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away.

Today’s tip: “By the time you hear bad news, its immediate impact may be over.”

If you hear bad news about a stock in which you invest, it’s easy to react impulsively and sell. But all investments come under a bad news cloud from time to time. If you always sell on bad news, you’ll pay lots of brokerage commissions, but you’ll never make money for yourself.

To decide when to sell on bad news, you need to develop perspective. You need to be able to tell if the company has hit a bump in the road or gone off a cliff. Here are our stock trading tips on good and bad reasons to sell in response to bad news:

Good reasons to sell:

• News of criminal activity: If a company is accused of underworld ties, money laundering, or even “accounting irregularities,” it’s probably a good idea to sell. Because of libel law, outsiders rarely make such accusations unless they can back them up. You may not miss much if the accusations prove unfounded. But you could lose 100% of your investment if they are true.

• Loss of a big part of yearly sales: If a company has just one product and it proves to be dangerous, ineffective or uncompetitive, sell the stock. Don’t wait for the company to launch a new product.

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Bad reasons to sell:

• Weak quarterly earnings report: One quarter of weak profit may simply be a normal fluctuation. By the time the news of a weak quarter comes out, it may have already had its impact on the price of the stock.

• Strikes: A single strike rarely puts a lasting dent in a company’s profitability. However, chronic labour troubles are a bad sign and may be a good reason to sell.

• Environmental, regulatory or anti-trust problems: These laws are complicated and constantly evolving through court and bureaucratic decisions, so it’s easy for well-meaning companies to run afoul of them. Also, unethical companies sometimes raise these issues to hurt their competitors.

Knowing when to sell is the hardest part of investing. You’ll make your investment life easier and more profitable if you mainly choose high-quality investments with honest managers and established, profit-making, reputable businesses. You can make money by holding these stocks and collecting dividends over long periods, even if you sit through lengthy price setbacks.

Next Wednesday, June 30, 2010, Investor Toolkit will look at the ins and outs of stock splits.

You can get our latest stock trading tips, plus buy/sell/hold advice on stocks you may be considering buying (or selling), in our Successful Investor newsletter. Click here to learn how you can get one month free when you subscribe today.