When To Sell Stocks? Professional traders employ a dizzying array of strategies when buying and selling stocks and related products. These may involve complex efforts to protect against losses – for example, the Iron Butterfly – or they can be designed to ensure that the trader turns a profit, regardless of which way the stock moves. The Long Straddle is a classic example of this strategy in action.
In some cases, investors attempt to capitalize on small movements in the market by completing a high volume of short-term trades, known as day trading. The same technique can be employed over a few days or several weeks, but ultimately, these strategies are based on the assumption that traders will never hold assets for long.
All of these strategies have their place in the market, and some traders have succeeded in amassing large fortunes through their efforts. However, there is significant risk associated with this type of trading, and many inexperienced investors who have attempted these methods lost everything.
Average retail investors are better served by staying away from short-term trades and complex strategies in favor of more reliable methods of building wealth. Value investing, which focuses on a company’s fundamental characteristics and financial strength, is a far more practical choice.
Instead of buying and selling many shares over a short period, value investors choose quality stocks that can be purchased at a fair or discounted price. The underlying companies are well-positioned to deliver long-term growth, so it is a matter of designing a well-balanced, diversified portfolio and then holding the shares indefinitely.
Committing to a stock long-term requires patience and discipline. After all, it is hard not to panic when share prices drop, even though ups and downs are part of the standard business cycle. The trick is knowing when to ride out normal changes in share prices and when to sell stocks that no longer serve their purpose in your portfolio.
When To Sell Stocks: 5 Signs That It’s Time To Get Out
Experienced investors know that trading on emotion is the fastest way to lose money. Sharp drops in share prices or a general decline in the market tend to prompt widespread selloffs as investors move their assets out of higher-risk growth companies into safer alternatives.
Conversely, increased share prices can motivate impatient investors to sell too soon. They want to lock in profits immediately, despite the fact that the stock has more room to grow.
Instead of letting emotion guide your trades, limit big moves to these five situations that signal it is time to sell.
Poor Financial Management
Every business goes through ups and downs, and a single bad quarter is rarely a sign that it is time to sell the stock. However, when business fundamentals decline in such a way that the company’s future is questionable, it’s time to sell.
For example, Peloton stock rose dramatically at the end of 2020 and the beginning of 2021. During the pandemic, the company’s at-home fitness equipment and classes were a popular alternative to gyms.
Unfortunately, the company couldn’t keep up with demand and took some alarming shortcuts that compromised product quality. Then, in an effort to turn things around, it expanded too quickly and put itself into a precarious financial position.
After hitting more than $160 per share during the 2020 holiday season, Peloton is now trading below $10. The winners were those who saw the looming disaster in Peloton’s fundamental financial position and sold their shares before they went down in value.
Note: It is always time to sell when a company enters bankruptcy, though you are likely getting pennies on the dollar. At that point, selling at any price is better than getting nothing at all for your shares.
A More Promising Opportunity
Companies that provide reliable dividends and/or steady growth give your portfolio stability, making them key to building long-term wealth. However, sticking with safe stocks to the exclusion of all other opportunities will depress your returns.
Find a balance between low-risk, low-return assets and higher risk, higher potential reward stocks. If you identify a good opportunity, it is appropriate to sell some of your current holdings in favor of more lucrative options.
Mergers and acquisitions are intended to strengthen companies by adding complementary assets to the existing business. In many cases, the acquiring company is willing to pay a premium to ensure a deal is made – sometimes as much as 40 percent over the current stock price.
If you own stock in a company that is being acquired and you will get a premium price for your shares, consider selling when share prices go up. Lock in the windfall profits and reinvest in another stock, so you can avoid the volatility that comes along with combining companies.
To Meet Financial Goals
The purpose of your investments is to achieve your financial goals. If selling stock serves that purpose, then it is the right decision. For example, if you are making a major purchase like buying a home, selling stock can ensure you have the cash you need to close.
If you are experiencing financial hardship, selling stock can ease the stress – you can always start a new portfolio when your situation improves.
You may also need to sell stock to stay on track with a larger investing strategy. For example, rebalancing to ensure your portfolio allocation is appropriate for your financial goals is a smart move.
If your strategy includes a price target, stick to the plan and sell your shares when they meet the predetermined price threshold to lock in your profit. Then, reinvest in another undervalued company and repeat the process to build your long-term wealth.
Correct An Error
Everyone makes bad trades – it’s part of the process. Even if you research a company carefully, an unforeseen development can make you regret your decision.
Don’t stick with a bad stock – cut your losses and move on to a better investment. When a company is in decline, the only thing worse than realizing losses today is holding out and accruing larger losses in the future.
When To Sell Stocks: The Bottom Line
For most retail investors, the best strategy is to buy quality companies and hold them long-term. However, that doesn’t mean you should never sell stock. The top five situations in which you should sell include offloading a struggling company, cutting your losses on a bad investment, taking advantage of a more lucrative opportunity, locking in windfall profits, and adjusting your portfolio to meet your financial goals.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.