How to Know When to Sell a Stock

10
September

How to Know When to Sell a Stock

How to Know When to Sell a Stock

Oftentimes, buying a stock is much easier than selling one. You might know several people who invest in the stock market. More often than not, they will proffer advice on which stocks you need to purchase. Similarly, many books on investing cover – in great detail – the characteristics of profitable stocks. Yet, not many books or people offer advice when it comes to selling a stock. In all probability, you will end up having to take the decision on your own. Typically, investors only sell stocks when:

-        They have made a killing and want to capitalize on it or,

-        They have made a mistake and want to cut their losses

Knowing when to sell a stock is comparable to the conundrum that famous athletes and sportspersons encounter. After earning their reputation and their wealth by virtue of their sporting achievements, many sportspersons find it hard to draw the curtains on their careers. On the one hand, it is hard to give up something that has been a way of life for several years.Furthermore, the lure of achieving greater feats in the future keeps them interested in adding more feathers to their caps.

The Reasons and Occasions on which People Usually Sell their Stocks

Here is a list of reasons that make it easier to assess whether it’s time to sell your stock.

-        Cutting Your Losses: Prudent investors do their homework before they purchase stocks. Therefore, they analyze the company’s performances, debt-to-equity ratio etc. before they invest in the company. As time passes, these parameters could be useful for evaluating the company. They might highlight the fact that the company is not as profitable as it was in the past. In these circumstances, cut your losses and move on. You might lose some money on the investment. However, you should be able to recover that by investing what you have in a better stock.

-        You Need the Money: People invest money in stocks for making profits. This helps them build a pool of funds for meeting various expenses. These expenses could include purchasing a house, paying for your child’s college education etc. Therefore, when the time comes to meet these expenses, sell your stocks.

-        Identify Targets and Measure the Company on its Ability to Meet Them: Noted investor Warren Buffett advised investors to avoid focusing solely on the price of the asset. He asked investors to evaluate the future productivity of an asset as well i.e. growth, sales, earnings etc. Investors appraise a company before investing in it. This enables them to determine the targets they want the company to achieve in a specified timeframe. If the company meets those targets, hold on to your investment and set fresh targets. Otherwise, sell the stock and invest elsewhere.

-        Forecast the Yield You Anticipate from Your Investment: Some investors invest in stocks based on the anticipated yields offered by the stock. In many cases, the yield could denote the share price. Alternatively, the yield could represent the percent of the change in the price of the stock. Once the stock touches these thresholds, investors evaluate the situation afresh.  This helps them decide whether they should hold on to the stock or dump it.

-        Take Stock of the Situation when the Fundamentals Change: Based on certain parameters, investors purchase some stocks in a company. Clearly, the situation will not remain constant with each passing day. Therefore, these individuals might spend some time each day in monitoring their investments. Whenever they observe the occurrence of some fundamental changes in the company, they take stock of the situation. For example, they anticipate the impacts of major changes like:

  • Mergers and acquisitions
  • Sales
  • Significant changes in the company’s financial strength
  • Major changes in the company’s earnings or revenue
  • The arrival of a fresh competitor in a hitherto closed field

If the changes indicate that the company could be in for a rough time, they consider selling the stock.

-        Rebalancing Your Portfolio: Prudent investors seldom place all their eggs in the same basket. In other words, they focus on creating a diverse and balanced portfolio. This keeps their investments safe. This is the case even if a particular stock experiences turbulent times. However, situations could arise where the market’s ebbs and flows imbalance a previously balanced portfolio. For example, you might have invested in 10 companies. Each company in your portfolio might have a 10 percent weight. A bullish market could result in one company ending up with a 20 percent weight, while the remaining companies shrink to about eight percent. In situations like this, consider selling the overbalanced stock. This is useful for restoring parity in your portfolio.

-        Assess Whether the Stock is Still a Worthwhile Purchase: As you monitor the performance of the stock market, you could find certain stocks worth investing in. However, to purchase those stocks, you might need to sell some of your existing stocks. When considering which stock to sell, check whether you would purchase the stock you plan to sell on that specific day. If the answer is negative, replace the stock with another one.

Deciding to purchase a stock is not an easy decision. However, determining whether you should sell a stock is even more difficult. This is why financial experts believe that investors must buy stocks with the intention of holding on to them for several years. Yet, situations could arise where you need to sell your stocks. Getting your timing right is the key to success in these cases. In the words of James K Glassman, “You need to know what makes a business great to understand when it is no longer great. Then you'll know it's time to sell shares.”

More Reading

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How to Know When to Sell a Stock 547How to Know When to Sell a Stock

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