Sell a double?

Q: When one of my stock holdings doubles in value, would it be smart to sell it and buy a different stock? — C.T., Rochester, Minn.

A: Not necessarily. Investors should always be looking forward, not backward. So don’t focus on how well or poorly the stock has done so far. Instead, think about how you expect it to do from this point on. Try to determine how overvalued or undervalued you think the stock is, and what you think of the company’s growth prospects, competitive strength, financial health and so on.

Doubling your money is great, but the best stocks will double in value many, many times, and you might miss out on real gains by selling too soon. If you’re not that confident, though, you might indeed sell — or strike a compromise and sell just some of your shares to lock in some gains.

Here’s a warning, though: If the stock has grown so much that it now makes up a big chunk of your portfolio’s total value, consider selling at least some shares. Even seemingly unstoppable stocks can head south sometimes, and you don’t want to get burned if your largest holding crashes.

Q:

What’s “arbitrage”? — S.B., Tulsa, Okla.

A:

It’s when investors take advantage of temporary price differences across markets.

For example, Carrier Pigeon Communications (ticker: SQUAWK) might be trading at $75 per share on a United States stock market and at $75.10 per share on a foreign market. If you simultaneously buy some of the lower-priced shares and sell the same number of higher-priced shares, you’ll net 10 cents per share (not counting any commission costs). Arbitrageurs usually invest very large sums to make this worthwhile.