We hear it all the time, “When should I sell my shares?” Sometimes it is because the stocks are malfunctioning and the investor wonders if it is time to jump. But other times, stocks work well and it’s hard to decide if stocks have reached their full potential. This post will explain how to determine when to sell a stock and what options you have to advance.
When should I sell my shares?
There are basically three reasons why you might want to sell a stock:
- Your shares are performing well and you want to make a profit
- Your actions are malfunctioning and you want to minimize losses
- You want to invest in different stocks and you need the funds
But while these motivations are clear enough, it’s not always easy to know the best time to sell a stock. After all, a stock can continue to work well and selling too soon can mean losing the increase in profits. Similarly, there is no infallible way to know when an action can bounce back and climb to the top. However, there are some general tips that you can use to optimize your investments, and it is to these that we will now turn.
How to decide when to sell a stock
Selling a stock is not an exact science, but that doesn’t mean you have to go with your “gut” either. The following tips will show you how to decide when to sell a stock.
Reach your price goal
When you made your initial investment, how much did you expect to earn? It is always advisable to set a price target (or at least a range) when considering selling the shares. A reasonable price target will be if the value of the stock doubles from the time you initially bought it. If you have achieved this goal, it may be a good time to consider selling.
Your stocks have accumulated
As a basic investment principle, don’t make money with high value stocks; make money with growing stocks. If your stock has stopped growing, it means you will not make any extra money. It may be time to undo this stock and find one that is expected to grow.
You want to invest in a different stock
Of course, you might just want to invest in a different company, perhaps because you anticipate a good future return or even because you share that company’s ethical concerns. Whatever your reason, you can sell a stock to free up funds to invest in a different company.
Notice a decrease in fundamentals
Don’t wait until stocks start to fall. Monitoring stock performance is critical, especially when focusing on the fundamentals of the business, such as profit margins, cash flow, and any significant changes in the business structure of the company (more information below) .
After a merger
Mergers are rarely successful, at least not from a short-term perspective. A merger can take many months to take effect. And even if the merger works smoothly, the company usually undergoes a major restructuring. At the end of the merger, you may find that you have invested in a company you no longer know. While a merger can lead to future success, it’s best to sell your shares and wait to see how the company performs once the dust clears.
After a bankruptcy
Bankrupt companies do not offer anything to shareholders. If a company declares bankruptcy, you should sell your shares as soon as possible to minimize total losses. In addition, you can use this loss to offset future capital gains for tax purposes, so it is essential to keep a record of what happened and when.
After a scandal
Scandals and fraud have a dramatic impact on the public image of the company, as well as on the value of the company’s shares. Sometimes fraudulent practices are telegraphed to the public through rumors and press leaks, which presents shareholders with a difficult decision: do you trust the company or do you trust the media reports? Note that some investors could spot fraud at Enron before it occurred and save money by selling their shares before prices fell.
When should you sell shares for profit?
Please note that the factors we highlighted above are not mutually exclusive. In other words, you can make your decision based on a combination of these factors. For example, you might consider selling shares for profit if there are several factors at stake simultaneously:
- Did you reach the target price?
- Has the stock price stopped rising?
- Are there other stocks you want to invest in?
The best time to sell stocks is when you can say yes to at least two of these three questions.
When should you sell shares at a loss?
At the same time, it is not always advisable to sell a stock just because of a decrease in price. During a volatile market, for example, the price of an individual stock can fluctuate enormously, which may even reflect the behavior of stock investors.
The best time to sell shares at a loss is when your overall trend seems downward and you need to sell the shares to reduce losses. Instead of clinging to the hope of a miraculous rebound, it may be time to reduce losses and invest in different actions.
How to know when to sell a stock: Decide in advance
Sometimes it is advisable to ask yourself in advance, “when should I sell my shares?” You can automatically define various types of stock orders to sell lower-performing stocks. We will cover three common types.
A stop order is designed to sell a stock if it drops to a specific price. For example, if you invest in a company that is currently trading at $ 20 per share, you can place a stop order that will dismiss the shares if they fall to $ 10 per share. As long as your action performs well, this command will never be executed. But if the price falls, more significant financial losses will be saved.
Please note that this automated stock order will not necessarily work simply. In our example above, a stop order set at $ 10 per share does not guarantee that you will receive the full $ 10. Shares could just as easily drop to $ 5 per share, which will be the price at which the shares are sold. A stop order simply determines the price at which the shares are sold.
Final stop order
A final stop order is simply a variation of a stop order. Although a standard stop order depends on a specific market price, a final stop order depends on the percentage change in that price. So in our example above, if you invest in a stock sold at $ 20 per share, you could issue a final stop order of 10%. This would mean that if the share price dropped 10% (or more), the shares would be sold automatically.
A stop limit order sets a stop order and a limit order. This sets a range by which your shares are sold. Going back to our example, if you buy a stock at $ 20 per share, you can issue a stop order that sells the shares at $ 10 per share, as well as a limit order that sells the shares for at least $ 5 per share. Thus, if the shares fall to $ 7 per share, the shares are sold. However, if it drops to $ 3 per share, the shares will not be sold. It may seem a little confusing, but it gives investors maximum control over their gains and losses.
Summary: “Should I sell my shares?”
There is an art and a science to investing in stocks, and you will ultimately stay in the driver’s seat. It’s rarely easy to decide exactly when you want to sell a stock, but at least you can set an overall rank with careful planning.
Keep in mind that you should never use market volatility as a reason to jump. Long-term investors understand that sometimes there will be fluctuating seasons and, if you adhere to it, you can guarantee the maximum return on your investment over your lifetime.
In addition, the changing dynamics of the stock market is a good reminder of why it is advisable to achieve a diversified portfolio. Multiple investments can protect you from substantial changes in market prices and can help you see your overall investments increase instead of focusing on individual stock prices.
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