The Right Time to Sell a Stock?
Many Good Reasons and Some Bad Ones
One of the common mistakes investors in the stock market make is selling a winning stock too soon. But, what is "too soon?"
Studies show that investors are more likely to sell a stock with a profit and less likely to sell a stock at a loss.
Although this may seem counter-intuitive, it is in line with studies of how investors in the stock market make decisions. It seems we are more likely to take a small profit (something concrete) than sell at a loss, which confirms our mistake and closes the door on a possible rebound.
There are good reasons to sell at a profit, but there is seldom a good reason to hold on to a confirmed losing stock. The fear of turning a "paper loss" into a real loss is strong.
When is a good time to sell a winning stock? Some would counsel never to sell winning stocks, while others caution that selling is a deliberate process just like buying.
Say you have a stock that had a good run and now you wonder whether you should take your profits and run or wait for a sign that the stock is about to reverse direction.
There are several warning signs that can tip you off to changes that may mean the price is headed south.
If the company's fundamentals (sales, debt, cash flow and so on) begin to show signs of stress, it may mean something has changed that will negatively affect the stock's price.
Don't wait for the market to panic over a decline in revenue or another key fundamental, be prepared to unload the stock while you still have a healthy profit.
Many investors set a floor on the stock's price so that if it falls below a certain level, they sell. You can also set an upper limit that triggers your sale.
The rationale here is that you may be afraid that the stock will have a difficult time supporting a market price above a certain level and any hint of bad news will send the price into a nosedive.
Other investors simply say, "I want to make this return, and when I hit that, I'm going to move on to another opportunity."
Dividend Cut or Eliminated
When companies start cutting or eliminating dividends, it is time to consider dropping it seriously.
Dividend cuts are serious events and signal financial difficulties that investors should pay close attention to.
Strategies for Selling
Other strategies for selling include the thoughtful consideration that events are moving against your stock and you need to act. Here are some ideas:
- Watch out for hype. If a stock you own becomes the focus of media attention and receives a lot of buzz, it may be time to look at taking a profit. These types of stock-feeding frenzies attract inexperienced investors who bid up prices only to have the market collapse when the hype dies. If you're not careful, you can watch the price fall right past your profit.
- Watch growth. Growth stocks grow. When they stop growing or growing begins to slow, it's time to move on. The market is not kind to growth stocks that fail to maintain their growth.
- Take part off the table. If you have a good profit in a stock, consider selling part — say 50 percent and taking your profit — while letting the remainder continue to grow. This way you lock in a certain level of profit and, if you follow the other tips here, you can bail on the stock when it starts to fall with some more profit.
- Better deal. Remember, there are other stocks that may provide a better opportunity with less risk. Just because you have a good stock with a nice profit, doesn't mean you shouldn't stop looking for a better deal.
Don't Be too Quick
While you always want to maximize your investment, don't eat into your profit by running up a big bill at your stockbroker in commissions through excessive trading.
A few smart trades will beat a dozen mediocre ones any day.