In the stock market, poorly timed decisions to buy and sell stocks will cost you money, and properly timed decisions to buy and sell shares will result in profits.
Even once you’ve got the factors to consider when buying stocks down, you still need to be able to determine when to sell. Once you own shares, your emotions can run the gamut from fear to greed, often swaying selling decisions and leading to losses.
When is the right time to sell?
The answer largely depends on the stock you’re talking about, what’s going on surrounding that stock, your risk appetite, and a host of other factors. Before making the decision to place a sell order, there are several questions you should ask yourself.
Reasons to Sell
There are several reasons you might want to offload shares of stock. Some of the most common include:
- Losses. Fear of loss is a driving emotion for investors, and it has been since the beginning of the stock market as we know it. When an investment you’ve made starts to lose money, the first idea that likely comes to mind is to sell it. But that may not always be the best course of action.
- Time to Rebalance. It’s important to rebalance your investing portfolio periodically to ensure the investments you’ve made in the past still fall in line with your goals.
- A Change in Circumstances. Circumstances change from time to time in the stock market, and when they do, they can result in changes to the outlook of one or more investments in your portfolio.
When these events happen, your knee-jerk reaction may be to sell shares in companies that are producing losses, aren’t performing as well as others in your portfolio, or have experienced changes in circumstances that lead you to question the future of the company.
In many cases, these instincts to sell may be leading you in the right direction, but in other cases, they could result in unwarranted losses.
10 Questions to Ask Yourself Before Selling Stock
Before you trust the feelings you get in your gut, it’s important to assess the situation by asking yourself the following questions.
1. Are Losses Mounting With Little Chance of Recovery?
Investing is all about using your hard-earned money to make money by purchasing assets now and selling them when they’re worth more later. Who wants to see the value of their assets going down?
When the stock price of one of your investments has fallen, it often leads to fear — one of the leading causes of significant loss in the stock market. But losses that appear only on paper aren’t always the end of the world.
Seasoned investors know that the market ebbs and flows, and attempting to time the lows and highs is a dangerous game. All stocks will have down days, even those that experience growth that outpaces the overall market.
What’s important is that the down times are followed by rebounds in the share price.
To determine whether the downward movement is likely short-term or part of a long-term trend, open your stock’s trading chart and look at a three-month time frame. Once you do, you’ll likely see a clear trend emerging, with the price of the stock either rising, falling, or remaining flat for the majority of the past three months.
If the stock’s trend has been downward over that longer time frame, it may indeed be a sign of longer-term weakness. Betting against a trend can be a risky move.
On the other hand, if the price looks to be relaxing a bit right now from recent gains, there’s a strong chance for a recovery as long as the stock is fundamentally strong.
The bottom line is that if a stock falls — especially right after you purchase it — and you find yourself nearing or experiencing losses, your knee-jerk reaction may be to sell your shares and accept your losses.
But unless something has changed in a major way — like sales declining, increased debt, or share dilution — there’s a strong chance the declines you’re experiencing will be short term and you don’t have to accept the losses quite yet.
2. Does the Stock Still Align With Your Investing Strategy?
Most successful investors follow a strict investment strategy that tells them when to buy and sell assets. Some of the most popular include:
- Growth. Growth investors are only interested in buying a company’s stock if it possesses growth characteristics that suggest significant potential for high returns. These investors look for upward trends in a company’s revenue, earnings, and share price that outperform the overall market.
- Value. Value investors attempt to find stocks that are trading below their fair market valuation. To do so, they use valuation metrics like the price-to-earnings ratio (P/E ratio), among others, to compare the value of one stock to its overall industry. The goal is to hold the stock until its price rises to or above fair market value, then sell it for a profit.
- Income. Income investors look for stable stocks that experience slow, steady upward movement. Moreover, these stocks must pay dividends, often at a rate above average for the industry.
When following any of these strategies, the best stocks today could become less-than-appealing tomorrow. Some growth stocks will experience slowing in their growth, some income stocks will hit a roadblock and reduce or eliminate dividends, and some value stocks will eventually become overvalued.
If you find that the stock you’re holding no longer fits in with your chosen strategy, it’s likely a good time to sell.
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3. Are There Catalysts on the Horizon?
Catalysts are events that cause the price of a stock to move in either an upward or downward direction. Some of the biggest catalysts investors look for are earnings reports, product launches, and changes to management.
Although changes to management are generally kept to the insiders until they actually happen, the market often anticipates product launches and generally has a schedule to follow for earnings reports.
There are a few ways to go about finding upcoming catalysts:
- Earnings Calendars. There are several earnings calendars online that tell you when financial reports are coming. Some of the most comprehensive calendars are provided by Nasdaq and Business Insider.
- PDUFA Calendars. If you’re following biotechnology stocks, you’ll find value in Prescription Drug User Fee Act (PDUFA) calendars. These are deadlines for the U.S. Food and Drug Administration to review new drugs. If a company’s application is approved, it can lead to significant gains, while a rejection could send a stock plummeting. Some of the most popular PDUFA calendars are offered by BioPharmCatalyst.com and RTT News.
- Follow the News. Finally, you can find signals pointing to coming catalysts by simply reading news reports published by financial media outlets like Business Insider, Barron’s, The Wall Street Journal, and more.
4. Do Market Conditions Give You a Reason to Sell?
The state of the stock market plays a major role in the way experts on Wall Street invest their money. Using the market data that’s available, investors pay close attention to whether the market is being controlled by the bears or the bulls and whether the economy is in positive or negative territory.
When deciding whether it’s time to sell a stock, it’s important to consider the state of the market and determine whether owning the stock is a wise choice at the moment. Here’s what you should consider:
- Positive Conditions. The market is on a bull run and the U.S. economy is booming — everything’s looking up from here. This is the time when you’ll want to take the most risk because significant rewards are up for grabs. Investing in small-cap stocks is acceptable as long as it’s managed well; growth stocks are a strong choice too.
- Fair Conditions. There’s no real growth or losses taking place, and everything seems to be at a standstill. During these times, it’s best to divest the majority of your high-risk holdings; if conditions go in the wrong direction, you don’t want to be left holding the bag. This is a good time to look for stable income stocks.
- Poor Conditions. Stocks are falling, job numbers are lacking, and additions to the unemployment line keep racking up. At these times, you’ll want to look for safe-haven investments and mix some income in. Toward the end of economic downturns, you’ll find low-hanging fruit in attractively priced value stocks.
When combing through your portfolio, consider the state of the economy and the market. Before selling, consider the stock’s value under current economic and market conditions.
For example, if you’re considering selling an income stock and moving toward growth, but your analysis tells you the market conditions are only fair, this setup makes growth less likely and your slow-growing income stock more attractive.
5. Have You Considered the Tax Implications of the Sale?
Anytime you make money in the U.S., you’re going to have to pay taxes.
When it comes to investing, gains on stocks you haven’t sold yet are known as unrealized gains, or paper gains. You can’t take those gains and buy dinner, a new outfit, or a new car, no matter how much money in unrealized gains you have.
Moreover, unrealized gains are not taxed until the asset is sold and the gains become realized.
Any profit generated from the sale of investments is taxed, and the rate at which it’s taxed depends both on your tax bracket and on how long you’ve held your investment.
When profits come from investments held for less than one year, they are taxed at your ordinary income tax rate. Profits from investments that have been held for more than one year are charged the capital gains tax rate.
While capital gains taxes also have income-based brackets, the capital gains rate is far lower than the standard income tax rate. It may prove worthwhile to hang onto your investment until you reach the one-year mark for the instant savings you get on your tax bill.
Stock sales can also help to reduce your tax burden as an investor through a process known as tax-loss harvesting.
When taking advantage of this strategy, investors sell shares of stock that have experienced a loss, giving them the ability to factor that loss into their taxes at the end of the year and reducing their burden.
Once the stock is sold and the loss is factored in, you can purchase similar assets to fill the void in your portfolio and hold until it’s advantageous to sell it.
6. Is There a Better Opportunity Elsewhere?
Opportunity cost is an important factor to consider in just about any area where money is made, whether it be a career, real estate investment, or investment in stocks.
Opportunity cost takes place when your time or money is tied up in one area that generates a return but could have been used elsewhere to generate a larger return. The difference between the two is your opportunity cost.
It’s important to look over your portfolio at least every three months and take the performance of each stock in it into account. Then do some research to see what’s buzzing in the stock market and look for other opportunities.
If you find a stock that fits better into your strategy and outweighs the opportunity from a similar investment in your portfolio, there’s no shame in selling one to buy the other.
7. Will You Incur Transaction Fees?
Stock trading has come a long way over the past decade. In the past, brokers would generally charge fees when you purchased or sold shares of stock.
While there are still plenty of brokers out there that charge these fees, there’s also a long list of commission-free brokers that have done away with them, leaving investors to only pay imperceptible regulatory fees.
If you’re working with a broker that charges commissions when you sell stock, it’s important to factor those commissions in before you decide to sell. Depending on the size of the gains generated through the investment, these commissions could take a serious chunk out of your profits.
8. Are You in Need of Cash?
Emergencies happen all the time, and although many investors have an emergency fund set aside in savings accounts, there are cases in which additional cash may be needed.
For example, what if you have $5,000 saved but your house needs a new $12,000 roof?
In cases when savings accounts don’t cover the emergency expenses that come up, you’ll need access to more money, and if you’ve been diligent about investing, the extra cash you need might be available through your stock holdings.
However, it’s important to decide whether you truly need the money before tapping into your investment portfolio to access it. After all, thanks to the power of compounding, the implications of divesting assets in your portfolio are much larger than the immediate cash you’ll receive.
Making the decision whether you need to sell investments to raise some cash may seem difficult, but if you set emotion aside, you’ll likely find that the decision is usually a simple one.
For example, let’s say you own a car with 80,000 miles on it, and the transmission dies. The first thought that might come to mind is, “it’s time to buy a new car.” You’ve been driving your current car for five or six years and you’re wanting to upgrade.
Say you’ve got $5,000 in savings — not enough for a new vehicle. Do you really need to dip into your investments for cash?
A new transmission costs between $1,300 and $3,400, according to the Transmission Repair Cost Guide, which is well within your capabilities with a $5,000 savings account.
According to AARP, the average passenger vehicle’s engine will last about 200,000 miles, so you still have about 120,000 miles of life left in yours if you repair your car rather than upgrade.
If you want a new car, there’s nothing wrong with that — but recognize it as a want rather than a need. It’s best to wait until your income allows you to afford the car without tapping into your investing account, or until your vehicle is truly on its last leg and replacing it is your only option.
At the end of the day, if you’re tapping into your stock holdings to raise cash, it’s best to make sure that you truly need the money first.
9. Are You Considering Simplifying?
Managing an investment portfolio containing a long list of individual stocks is time-consuming. Some investors get to the point where they make a change simply because they don’t have the time to properly manage their growing portfolios.
These investment-grade funds source capital from a large number of investors to buy a portfolio of stocks and other securities. There are multiple advantages to selling individual stocks to invest in investment-grade funds:
- Time. These funds are heavily diversified by their nature. It only takes a small handful of funds to create a balanced portfolio with exposure to a wide range of assets. This cuts down your research time tremendously, giving you more time to focus on other things.
- Control. Although you won’t control every investment these funds make for you, you will have strategic control by choosing funds that practice the strategy or strategies you’re interested in deploying.
- Low Cost. Managing your own portfolio comes with expenses. Some of the best trading platforms come with licensing fees, and some brokers charge a fee every time you make a transaction. When investing in a fund, its fees are laid out simply in its expense ratio. This makes your investing costs clear and gives you the ability to choose the lowest-cost, best-performing funds.
If you’re finding it difficult to keep up with your stock holdings and you want to sell your individual stock investments and buy investment-grade funds, by all means, go for it.
10. Did You Speak With an Investment Advisor?
After asking yourself the nine questions listed above, you’ll likely have a good idea of whether or not it’s time to sell the stock you’re interested in selling. However, if that’s not the case, don’t be upset, you’re not alone.
Investment decisions have the potential to change your life, for better or worse, over the long run. When decisions are that important, sometimes it’s best to go to a professional in search of assistance.
If you have a common cold, you’ll get over-the-counter medicine and treat it at home. If you have pain in your chest, you’re better off consulting a doctor than trying to treat the condition yourself.
The same goes for investing. If you are comfortable making your own investment decisions, knowing that your choices may have a profound effect on your future wealth and financial stability, that’s great.
But if you’re even the slightest bit apprehensive about whether to sell stocks after asking yourself all the questions above, it’s best to seek the assistance of a financial advisor or registered investment advisor.
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Deciding whether it’s time to sell a stock is rarely easy.
You should take several factors into account, including your financial goals and how selling the stock will impact your chances of achieving them, whether the stock makes sense in your investing strategy and current economic and market conditions, and whether selling the stock will benefit you more than holding the investment.
As with choosing stocks to buy, deciding to sell a stock often requires taking the time to research and understand the implications of taking action. By asking the questions above and doing your research, you’ll be able to make educated decisions that will have a positive impact on your financial well-being.