When Should You Sell?
When Should You Sell?
Most information you read about stock investing seems to discuss buying, but to actually profit from a stock investment, it must be sold. For many investors, selling a stock is the most difficult decision.
The reason selling is difficult for some investors is the fear of missing out on future profits. Let’s say an investor purchases a stock at $30 per share and decides to sell when the stock reaches $35 per share. But when the stock reaches $35, the investor thinks it is doing so well that it will surely rise more. The stock then drops to $31 and the investor decides to wait until it reaches $35 again. Then the stock takes another tumble to $24 and the investor just lost all the profit, plus some of the initial investment.
If selling is dictated by emotion rather than a well-thought-out plan, it is very likely to play out as described in the example above. A good selling decision may leave some profit on the table, but it should be determined by a rational analysis of valuation and price. The most successful investors do not focus on market timing by trying to sell at the highest price; instead, they focus on buying at one price and selling at a higher price.
If you have a difficult time with selling, you should consider using a limit order. This type of order will automatically sell the stock when it reaches your target selling price.
When to Sell
You should decide when to sell stock when you purchase it. Following are some examples when you should consider selling based on your personal financial situation, as well as warning signs with the companies you are invested in:
- If you are losing sleep over a particular investment, it may be worth reducing your emotional distress to sell it even if it’s a small gain or a loss.
- If you need money in the next three years to purchase a home or send a child to college, you should pull the money out while you know you have it.
- To help you reduce the taxes you will pay, you may want to look for investment losses to offset other gains.
- If your portfolio is shifting from your original asset allocation, you will want to rebalance it to get back on track.
- Watch your stocks for a high price/earnings (P/E) ratio, which compares the company’s recent earning to its stock price. If the P/E ratio is high, it can be an indicator that the stock is overpriced.
- Keep an eye on the company’s competitive advantage. If others have come up with a new product or technology, they can take their market share.
- If the company makes a drastic change in direction or management, it may indicate a problem with their business model. Research the changes and follow your instincts about the company’s future.
- If a company’s sales are falling, it may be signaling a problem. While all companies will go through slumps, if other competitors are experiencing growth during the same time period, it may be time to sell.
- When there is a trend of shrinking profits, it means the company’s expenses are rising faster than their revenues, and they are having a hard time keeping profits up.
- If a company cuts its dividend payment, it may be a signal that they are expecting lower earnings and less growth.