Please can someone explain the process of Top Skimming?

28th Oct '13 by tgh75

3 comments 15896 reads

Hi

Appreciating that I am new to holiding individual shares and I hear the phrase "top skimming" used regularly in reference to the current advances in share prices, but wanted to understand what it actually is and how people use it.

I would give the example of I have bought 1000 shares in company XYZ at £1.00 per share so an initial holding of £1000. They are now valued at £1.80 a share so making my holding value £1800.

I still think that XYZ are a good company to invest in long term so I do not want to sell my whole stake, though I do think that it might be an appropriate time to take some of the profit and reinvest that elsewhere.

Would top skimming typically be to sell GBP 800 so reducing my holding back to £1000? Or is it something different? Or have I got totally the wrong idea?

Finally typically at what sort of value of gain, and do you use £ or %, do you typically look to start doing this process?

Thanks
Tom

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Ian4321

28th Oct '13

Top skimming isn't really the correct term to use. You are referring to top-slicing where you sell part of your holding in a company to take some profits off the table but you still retain some of your holding because you still believe the company and its share price will continue to do well. Top-slicing is probably most often carried out when the profit made is equal to the original investment made in the company (selling half of your holding when the share-price has doubled) but if you consider it is a good time to take some profits go ahead and do it rather than wait for the share-price to double.
Ian

Edward Croft

Hi tgh. There are many different approaches. It's always important to look at the position in relation to the value of your whole portfolio. If your whole portfolio has doubled then the 80% gain in the company in question is actually a smaller proportion of your portfolio than it was before. Of course if your portfolio hasn't moved then the 80% gain will make your exposure to that position more extreme.

There is the old line that you should 'run your winners and cut your losers' - that's certainly very sound advice, but then again personally I've let my winners run up to many multiples of their original value only to see them collapse back ! These days I try to be a bit more prudent.

Some judgement is wise. A lot of investors will sell 25% of a position if it doubles. Some will sell half. My own bias these days is to apply some regular rebalancing.... either annually or semi-annually where I rebalance my portfolio to an equal weighting across all positions. On the other hand though - I do have my favorites and will let some of the better stocks run.

It's worth remembering Warren Buffett's advice - 'I look for hurdles I can step over, not jump over' - you can get rich slowly with compounding - rule #1 is to not lose money. It only takes a moment to look at what's happened to Globo (LON:GBO) overnight to realise that all stocks are highly speculative - and very driven in the short term by sentiment.

lightningtiger

30th Oct '13

I have top sliced ARM several times, also TEP. A profit is not a profit ,until you take it. I knew Globo was overvalued and a correction due. Rule number 1a for me, with Globo was do not panic. It has gone up fast over the year & when the dust has settled after this correction, I think it will come back again in a few weeks. I made an exception to the stop loss rule not to sell Globo, this is very risky. Dart group is an example and is back on track now.
Six of us had a great meal out last week, compliments of Royal Mail profits.
Cheers from Lightningtiger

Please can someone explain the process of Top Skimming?

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Tgh75

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