Exit Strategy

When your significant other fakes a headache at the office holiday party so you can get out of there and get back to binging Unbreakable Kimmy Schmidt at home. One form of exit strategy.

In finance, the exit strategy is the second half of making money from a trade. Many investors spend a lot of time figuring out what stocks to buy. But you need to sell the stock eventually to book a profit. Sometimes harder than it sounds.

An exit strategy is all about this end of the trade. It's about getting out of a position profitably and having a contingency plan for different situations.

You buy shares of Tiger Phone Inc., a maker of cheap cell phones, at $10 a share. The exit strategy should depend on why you bought the stock.

If you bought the stock because you expect a strong response to the upcoming release of its Siberian X model, then you might look to sell ahead of the launch. Wait too long, and you might miss your window.

Meanwhile, if you did fundamental research and found that, based on earnings and revenue, the company should be valued at $12 a share, your exit strategy might be to wait until the stock hits that level and then sell.

But what if it dips to $9? Maybe you buy more shares, with the idea that it has even more value at the lower price. Or maybe you sell in order to limit any losses, in case you were wrong about your initial assessment. All these contingencies are part of developing a cogent exit strategy.