Selling a stock is more than selling high after buying low. Many aspects affect a decision to sell, so you want your decision to pull the trigger to be strategic and well thought out. No matter how good of an investor you are, perfectly timing the market is almost impossible. Deciding when to sell a stock can be a difficult decision, but with a complete understanding of when and why to sell, along with a strategy, you can avoid the commonly made mistake of holding onto a stock for too long. Don’t invest money you aren’t comfortable with losing.
When to Sell a Stock
Ultimately, making money trading stocks comes down to when you buy and when you sell. To make a profit, you have to time these two decisions accurately, which can be tough to do. That is why rather than trying to time the market, it is better to make decisions based on research and different factors. Here are a few situations in which it might be best to let go of your stocks and reposition your portfolio.
- Bad Buys
Almost all experienced investors have been in a situation where they make an investment only to quickly realize it was a mistake. If you find yourself in the position of regretting an investment you made, it is best to take action sooner rather than later. Even if it means taking a small loss on your trade, you could be protecting yourself from further losses down the line.
- Dramatic Price Increases
Selling a stock purely because of a steep price increase may not always be the best course of action; however, if the factors causing the price increase are justified, it may be best. If the company’s fundamentals are strong, you might want to hold in the hopes of seeing even more gain. When the underlying fundamentals of a firm are improving and the stock price rises, it may mean the stock is now higher quality. On the other hand, if the price increased from speculation, rumors or a short squeeze, it could be good to sell. Doing research to understand the movement in price will help you to determine whether you should sell or if the stock price will continue to rise and you should hold.
- Hitting Price Targets
As an investor it's hard to not let your emotions get the best of you. This is why setting limits and having a strategy is important. Generally, it is advised that when you make an investment you set price targets and limits for yourself to avoid the downfalls of getting greedy. You can set targets to control when you take your wins and your losses. If either of your determined targets are met, it is best practice to follow your strategy and sell.
- Deteriorating Fundamentals
When a stock's fundamentals deteriorate, it is a good sign that the underlying company is struggling and losing value. Fundamentals are the factors that contribute to the value of a company or a firm’s worth. When a company loses fundamental value, the stock price will often reflect this and begin to drop. When the market begins to acknowledge a decrease in intrinsic value, it often results in an exponential decrease in share prices as a large volume of shares will be sold off and recirculated into the market. It is best to act quickly before this decline begins to ensure you aren’t taking on any further losses on your investment.
- Extrinsic Reasonings
Personal or extrinsic reasons to sell can range from financial reasons to ethics and morals. As an investor, if your financial situation is becoming unstable, you might want to sell a holding. You might need to liquidate investments for cash to buy a house or a car. If you need to start or replenish a savings or emergency fund, you might want to sell.
Selling Stocks vs. Holding Stocks
Selling a stock means you are either happy with your gains or are wanting to cut your losses. On the other hand, holding a stock means that you believe it still has room to grow and can overcome any negative price movements. Value investing is a tried and true investment strategy, practiced by many. This strategy is based on buying low-priced, high-quality stocks and holding your investments for long periods of time. However, markets are unpredictable, and sometimes you sell in order to cut your losses. While it is best practice to stick to your strategy, there are certain circumstances where that doesn’t hold true and you would be better off diverting from your plan and selling your stocks.
It’s Not a Loss Until you Sell
A good tip to remember as an investor is that you don’t lose until you sell. This means that your losses will not be realized until you actually sell your holdings. Stocks often recover in the long-term, allowing you to generate a positive return. When you determine what is causing the movement in price, that will help you to determine if you should sell. If the price decrease is cause by bad press or speculation, chances are the stock will recover and you might want to hold your position. However, if the cause of the price decrease is because of fundamental reasons, it is safe to assume that that company is struggling and may not be able to recover. In that case, consider selling.
Frequently Asked Questions
Can you sell a stock on the same day you bought it?
Technically you are free to buy and sell stocks as many times per day, as this is what day traders do. However, be sure that your trading account is approved for day trading; if not, you could be flagged by the U.S. Securities and Exchange Commission (SEC).
Should you sell stocks in danger of being delisted?
Generally, it is advised to sell your position before a stock gets delisted. Delisting doesn’t affect ownership, but it is likely to drive the stock price lower.