Many investors have their own rules for buying stocks. However, selling stocks is not as easy as buying them. Investment experts believe that people should do their homework before purchasing a stock. Thereafter, they should hold those stocks for a lifetime, even as they make a few minor tweaks and adjustments to their portfolios.
Buying and selling stocks involves numbers and money. Therefore, people invest a significant part of their time (and emotions) finding worthwhile stocks in which to invest. For this reason, they find it hard to cut their losses and sell a troubled stock. Alternatively, they might be reluctant to sell a stock that is experiencing a low, because of the profits it yielded in the past. Hoping for an upturn in fortunes is not the best strategy to adopt when it comes to shares.
You Often Need to Sell Stocks for the Very Reasons that You Bought Them
Ideally, when you purchase a stock, you have an idea about why the stock appeals to you. Therefore, when you sell it, it should be because the aspect that once appealed to you is no longer attractive. For example, consider that you purchased stocks because you valued the company’s fundamentals. Once these fundamentals experience a downturn, your awareness could help you decide whether to retain or to sell the stock.
Similarly, you might have bought the shares of a company, which is an industry leader. Once you find a competitor displacing it, you might consider selling your shares. Some investors purchase stocks in sectors they find attractive. Once the sector experiences a downturn, these investors could assess whether the downturn is temporary or long-term in nature. They might sell their stocks if it appears that the situation is unlikely to change for some time.
10 Warning Signs that Your Stock might be in Trouble
Investors usually buy and sell stocks to make a profit. On occasions, the performance of the stock could force their hand. Given below is a list of 10 signs that your stock could be heading for trouble. Consider selling your stock if:
- The stock price drops below $10 per share
- The stock price registers a drop of 15 – 20 percent
- The stock price has plateaued out and you realize that you could invest your money in another company to maximize your profits
- The price-to-earnings ratio per share is higher than that of other companies in the same sector, with nothing to account for this variance
- The company’s sales and return on equity compare unfavorably with the numbers registered by its competitors
- The company’s earnings continue to decline in comparison to the preceding years
- The company’s volume of debt begins to increase
- The company announces a cut in its dividends
- You hear that several managers in the company have begun selling huge volumes of stocks
- You observe that the company is using more cash than it makes, which could result in the company filing for bankruptcy
Warren Buffett’s advice on investing entailed ‘being fearful when others were greedy and being greedy when others were fearful’. However, you need to heed the signs of warning listed above. These signs could indicate that you need to get rid of some of your unprofitable stocks. You might have invested more than your money in a specific stock. However, on occasions, it is wiser to cut your losses than to lose your money – along with your peace of mind.
Understanding the stock market for beginners is vital for the long term success in the financial markets and if you are thinking about taking your knowledge a step further and actually start building your own portfolio than you must get as much education and knowledge in trading stocks before you embark on such a journey.
Learn more about the stock market to avoid making costly mistakes with our Fundamentals of the Stock Market course.