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When to Sell a Stock
Theoretically, the ability to make money on stocks involves two key decisions: buying at the right time and selling at the right time. In order to make a profit, you have to execute both of these decisions correctly.
Theoretically, the ability to make money on stocks involves two key decisions: buying at the right time and selling at the right time. In order to make a profit, you have to execute both of these decisions correctly.
Many investors have trouble selling a stock, and sometimes the reason is rooted in the innate human tendency toward greed. However, there are several strategies that you can use to identify when it is (and when it isn't) a good time to sell.
The most important thing about these strategies is that they attempt to take some of the human emotions out of the decision-making process.
There are generally three good reasons to sell a stock. First, buying the stock was a mistake in the first place. Second, the stock price has risen dramatically. Finally, the stock has reached a silly and unsustainable price.
While there are many other additional reasons for selling a stock, they may not be as wise of investment decisions.
Selling Stock Is Hard
Here's an all-too-common scenario: You buy shares of stock at $25 with the intention of selling it if it reaches $30. The stock hits $30 and you decide to hold out for a couple more gains.
Here's an all-too-common scenario: You buy shares of stock at $25 with the intention of selling it if it reaches $30. The stock hits $30 and you decide to hold out for a couple more gains.
The stock reaches $32 and greed overcomes rationality. Suddenly, the stock price drops back to $29. You tell yourself to just wait until it hits $30 again. This never happens. You finally succumb to frustration and sell at a loss when it hits $23.
In this scenario, it could be said that greed and emotion have overcome rational judgment. The loss was $2 a share, but you actually might have made a profit of $7 when the stock hit its high.
These paper losses might be better ignored than agonized over, but the real question is the investor's reason for selling or not selling.
To remove human nature from the equation in the future, consider using a limit order, which will automatically sell the stock when it reaches your target price. You won't even have to watch that stock go up and down. You'll get a notice when your sell order is placed.
Sell Stock When Buying Was a Mistake
Presumably, you've put some research into this stock before you bought it. You may later conclude that you've made an analytical error, and you realize the business is not a suitable investment. You should sell that stock, even at a loss.
Presumably, you've put some research into this stock before you bought it. You may later conclude that you've made an analytical error, and you realize the business is not a suitable investment. You should sell that stock, even at a loss.
The key to successful investing is to rely on your data and analysis instead of Mr. Market's emotional mood swings. If that analysis was flawed for any reason, sell the stock and move on.
The stock price might go up after you sell, causing you to second-guess yourself. It's also possible that a 10% loss on that investment could turn out to be the smartest investment move you ever made.
Of course, not all analytical mistakes are equal. If a business fails to meet short-term earnings forecasts and the stock price goes down, don't overreact and immediately sell (assuming if the soundness of the business remains intact).
But if you see the company losing market share to competitors, it could be a sign of a real long-term weakness in the company.
Sell Stock When the Price Rises Dramatically
It's very possible that a stock you just bought may rise dramatically in a short period of time. Many of the best investors are the most humble investors.
It's very possible that a stock you just bought may rise dramatically in a short period of time. Many of the best investors are the most humble investors.
Don't take the fast rise as an affirmation that you are smarter than the overall market. It's in your best interest to sell the stock.
A cheap stock can become an expensive stock very fast for a host of reasons, including speculation by others. Take your gains and move on. Even better, if that stock drops significantly, consider buying it again.
If the shares continue to increase, take comfort in the old saying, "No one goes broke booking a profit."
The Bottom Line
Any sale that results in profit is a good sale, particularly if the reasoning behind it is sound. When a sale results in a loss with an understanding of why that loss occurred, it too may be considered a good sell.
Any sale that results in profit is a good sale, particularly if the reasoning behind it is sound. When a sale results in a loss with an understanding of why that loss occurred, it too may be considered a good sell.
Selling is a poor decision only when it is dictated by emotion instead of data and analysis.
