Are you always confused on when to sell a stock? Or rather, you are not sure when you should be selling your stock even though you have been involved with this in the past?
Then this article will be beneficial as it will guide you on when to sell a stock.
I have come to realize that both investors and speculators at times are not sure of when to sell a stock.
Most of them end up selling their stock before they reach their peak while others refrain from selling, hoping to recover their invested amount.
With this being the situation, in reality, it begs the question, how does one know when to sell a stock?
It is good to have some signs that help a trader in making the decision to sell stocks.
To make money from stocks, you only need two important decisions, buying and selling at the right time.
The other factors are usually secondary.
When to Sell a Stock
When there is a Need to Rebalance Your Overall Portfolio
With a good and detailed portfolio, then you are not weak in all aspects of the market.
I would advise you to examine your portfolio at least once every year and rebalance your holdings to make sure that you have the correct combination of assets as per your general plan.
Do a rebalance of your trade portfolio annually by selling the winning stock and purchasing more of those that failed to do well.
This helps you to remain with the basic investing rule of buying low and selling high.
If Buying the Stock was a Mistake
Assuming you put in some research into the stock before buying it. With time you might note that you made an error that basically impacts the business as a good investment.
You should consider selling the stock even though you end up suffering a loss.
So as to be a good investor, you need to rely on your data and analysis and not merely on emotions.
In case the analysis turns out to have been inaccurate, sell the stock no matter the gains or losses.
The price of a stock could go high after you sell the stock, leaving you to doubt whether you made the right decision to sell.
Also, a 10% loss on the investment may end up being the best investment for you.
Not all the analytical mistakes are the same, and when a business does not earn the short term target, this should not be a trigger to overreact, and you should sell if the calm state of the business stays intact.
However, if the company is losing market share to its competitors, it could be an early show of future weakness, and this can be a good reason to sell.
Maybe right now you have more data and information than you did the time you were buying the stock.
Holding onto a stock that you already know you made a mistake when buying can be detrimental.
Yes, you might have accrued a small loss already, but it is better instead of waiting to see if the stock will peak, and end up incurring even a bigger loss.
Realizing that you invested in the wrong stock is one of the classic examples of when to sell a stock.
When a Better Opportunity Comes Up
This is a good example of when to sell a stock.
Even as having some money saved is always a good idea just in case a good investment opportunity pops up, there are times when you wish to make investments that are worth more than you have in liquid cash.
In such cases, it is alright to sell off a stock so as to make some capital available even though maybe the company is still struggling, and the price of the stock is yet to reach its fundamental value.
This can be done even though the returns are negative, depending on the value of the opportunity that has presented itself.
I know the ultimate goal for any investor is to make profits. However, it is not advisable to continue searching for better opportunities to invest in all the time since the market offers no guarantee for profits.
Operating in this manner will always lead you into hopping from one investment to another hence failing to actualize the potential returns for your investments.
This is something I have seen in forex trading( I should mention I am a full-time forex trader).
Among the trading mistakes that most traders in the forex market make is jumping from one trading strategy to another with the objective of finding the “holy grail,” which does not exist.
As a result, a trader ends up spending a significant amount of time learning how to trade but ends up mastering nothing even with all the efforts.
So, it is good to stick with investments at times rather than always being on the lookout for something more superior.
You might end up losing money since most of your reasoning is emotional-based, given that the likely profits are the main driving force.
However, should you happen to get a stock that is much better than the one you intend to sell, but then have less cash to invest in the other stock as you desire, it is okay to go ahead and sell the weak stock.
When a Stock Hits the Target Price
This is the ultimate time when to sell a stock.
Majority of the investors have a floor on a stock’s price to take care of the profit in case the stock falls below a specified level.
There are times when you will also have an upper limit, which is meant to trigger a sale for the stock.
It is highly possible that you are afraid the stock will not have an easy time supporting the market price above the specified level. This is when the indication of bad news is likely to make the stock to plunge.
There are those investors who just hint out that they want to make a specific amount of returns, and then having achieved that, they sell their stocks and proceed to another opportunity.
With such a mindset, investors are able to make good stock-trading decisions that are not emotionally instigated and thus realize higher profits with time by not engaging in sales out of panic or any other negative emotion.
One thing you should master while investing is putting your emotions in check. Emotions can mess you up hence result in making poor, irrational decisions.
The best way to avoid this is by planning beforehand on what to do at all times.
Selling when there is Media Hype
The time you were searching on when to sell a stock, I know you were not expecting this.
Well, it makes a lot of sense.
When your stock ends up being hyped by the media and receives so much investment noise, it might be best to consider taking profit.
Such stock-feeding occurrences get to investors with little or no experience, resulting in an increase in stock price.
This is the best time to sell the stock.
The stock has already reached a level that naturally would not have been actualized within that time frame.
The prices might end up going so high to a level that is no longer attractive to investors.
At this point, the media hype stops, and the stock ends up plunging in a quick fashion.
At the end of it, you might find yourself being negative even if you were on a positive before the media hype commenced.
In Case the Stock Rises Dramatically
This is not similar to the media hype as the sharp rise might be attributed to other factors.
It is possible for a newly bought stock to rise dramatically over a short time for various reasons.
You should always strive to be a humble investor.
Humble investors are the best as it is advisable to not assume that the sharp stock rise confirms you as a smarter investor than the general market.
Go ahead and sell the stock since you do not know the reason for the sharp rise.
It is possible for a cheap stock to easily become very expensive and in a short time, for various reasons.
It might end up coming down in the same dramatic fashion.
Whatever you earn, take it and move on.
Better still, when the stock significantly drops, think of purchasing it again.
When the shares keep increasing, just think of it from the perspective that you cannot end up broke while booking a profit.
When You Need Funds for an Emergency
You should note that I don’t consider this to be the most ideal time when to sell a stock.
In case you are faced with a situation that was unplanned and you really require funds to handle it, you may consider selling your stocks.
Such situations may include:
- Economic hardships
- Car repairs
- Medical bills
- Identity/ Financial theft
- Home repairs
- Job loss
Some situations are beyond our control, but I don’t rate this highly on instances when to sell a stock.
You should always consider investing for long-term goals like retirement.
It is advisable that you already have a savings account just in case of unexpected emergencies.
Having an emergency fund will work as a safety net on periods when you need money abruptly without having to interfere with your investments.
In conclusion, I hope now you have an idea of when to sell a stock. I would advise you to draft a checklist when buying a stock on when you are likely to sell it. If the scenarios outlined do not arise, don’t sell the stock since it will now indicate that the decision being made is emotional and not financial.