When should I sell my stock?
If you have been trading for less than an hour you have probably already asked yourself this question.
Most of the investment advice is geared toward buying of stocks. This should come as no surprise to investors since it’s the buying of securities that begins the entire investment process.
It’s also the buying that generates commissions and fees for brokers.
Of course, what is bought must eventually be sold, and each trade exacts commission and fees.A common mistake investors make in the stock market is selling off a winning stock too soon.
But, what does too soon look like?
In this article, we’ll look at the art of selling a stock.
When Is the Right time to Sell a Stock?
Buying a stock at the right price is vital. The ultimate return one will gain on any investment is first determined by the purchase price.
In a way, one can argue that a profit or loss is made upon buying; you just don’t know it until you sell.
So, lets see when is the right time to sell off your stocks.
1. Made a mistake in buying
If upon buying stocks, you later conclude that mistakes were committed in the analysis, mistakes that fundamentally affect the business as a suitable investment, then you should definitely sell your stock, even if it means a loss will be incurred.
The key to successful investing is to rely on your data and analysis instead of the market’s emotional mood swings. If that analysis was flawed for one reason or another, move on.
2. The Stock hits a Target Price
Many investors set a floor on the stock’s price so that if it falls below a certain level, they sell. You can also set an upper limit that triggers your sale.
Your rationale here might be that you fear the stock will have a difficult time supporting a market price above a certain level and any hint of bad news will send the price into a nosedive.
3. If You Need to Re-Balance Your Portfolio
You also need to consider your financial plan.
Perhaps you need to re-balance your portfolio. Maybe your investing goals have changed, and a particular stock no longer fits the bill.
In such a case, it might be worthwhile to sell, and then use the proceeds to purchase an investment that better fits your current goals.
4. Personal Financial Needs
Stocks are an asset, and there are times when people you need to cash in these assets.
Whether it is seed money for a new business, paying for college, purchasing a home or something else, these types of selling decisions depend on an individual financial situation rather than the fundamental reasons for a stock being sold or the market itself.
So, If you encounter an unexpected expense and you absolutely need money to cover it, it might be a good idea to sell your stocks.
5. Business Starts to Fail
If the company’s fundamentals, such as sales, debt, and cash flow begin to show signs of stress, it might mean something has changed that will negatively affect the stock’s price.
Don’t wait for the market to panic over a decline in revenue or another key fundamental, be prepared to unload the stock while you still have a healthy profit.
6. There are better places for your money
Of all the reasons to sell a stock, this is by far the murkiest.
In fact, it’s best to avoid using this stock-selling justification if at all possible.
However, from time to time, life can get in the way.
Opportunity cost is a benefit that could have been obtained by going with an alternative. If that alternative is better, then it makes sense to sell the current position and buy the other.
Accurately identifying opportunity cost is extremely difficult, but could include investing in a competitor if it has equally compelling growth prospects and trades at a lower valuation, such as a lower price to earnings multiple.
The decision to sell a stock is a combination of art and science. There are a number of considerations to make, such as those above, when deciding if stock gains have run their course or are likely to continue.
A common-sense strategy is to sell as a stock rises in order to lock in gains over time.
So, once you make the decision to buy a stock, there’s nothing more hazardous to your wealth than frequently trading in and out of positions. But selling stock should be a rare occurrence, and only if you fall under one of these six circumstances.
Otherwise, stick to a regular investing schedule, check your portfolio quarterly, and go on enjoying your life.
Disclaimer: The views expressed in this post are that of the author and not those of Grow