When it comes to investing, deciding when to sell a stock is frequently more difficult than deciding when to acquire it. Should I sell my stocks now? When is the time to take stock profits? These are the questions that every investor will ask themselves sooner or later. If you sell too quickly and the stock rises, you may miss out on profits. If you wait too long to sell and the stock falls in value, you may have missed your opportunity.
For example, with the stock markets going through a rough patch in 2022, you may want to sell part of your holdings to avoid further losses. So far this year, the S&P 500 is down roughly 18%, while the tech-heavy Nasdaq Composite is down more than 25%. So far this year, the European DAX, STOXX600, and CAC40 have all fallen by 18, 15, and 14%, respectively.
Even while selling stocks when the market is down may make you feel better in the short term, it is not a smart long-term investment strategy. Volatility is a regular component of stock investment, so selloffs should be expected on occasion.
Let’s take a closer look at when you should (and shouldn’t) sell a stock.
Reasons associated with the stock and/or markets
When the first decision to buy was wrong
Most investors with a lot of experience may have been in this situation at some point. You’ve been watching this stock making huge gains every day, so you decide to stop being skeptical and place a large buy order for it. But as soon as you do that, you know you probably did something wrong. In this situation, selling the stock is the best thing to do, even if it means taking a small loss on the trade. And if you don’t want to make the same mistake again, don’t chase hot stocks that are running out of steam, because they could cost you money.
When the price increases significantly
Selling a stock because it’s grown in price isn’t always wise. The company’s fundamentals may justify some price rises. In other circumstances, prices may have risen exponentially owing to speculation, takeover rumors, or a short squeeze. In such circumstances, the investor should perform some research to determine the cause for the stock gains, and based on the results, sell the complete position or sell part of the position and set a stop order to sell the balance if it trades below a specific price. The more a stock’s short-term profits impact your portfolio, the more important the sell decision.
When a stock’s price hits your target
Have you ever held a stock that had been in the doldrums for years, but then got a new lease on life and is now trading at the price you paid for it? If you promised yourself that you would sell the stock if it ever returned to your purchase price, sell it now. Similarly, if a company hits a level that it has only briefly traded at in the past, and you have always assumed that you would sell if it reached that price again, or that you would consider selling part of your holding rather than lament another lost chance, why not sell it all?
When fundamentals weaken
Slowing profits and/or sales growth, increasing competition, higher expenses and reduced margins, or value might erode a stock’s fundamentals. A company’s quarterly earnings report or “guidance” before an earnings report may imply worsening fundamentals. Market reaction to unfavorable corporate news, such as an earnings miss or decreased future guidance, is immediate and unambiguous, with the stock plunging double digits. The investor must assess if the stock’s fundamentals are transient or permanent. Since this is difficult, it may be best to sell and leave the position first, then decide if it should be bought again.
When the business is acquired
If a company says it has agreed to be bought out, that could be another good reason to sell. When an acquisition is announced, the stock price of the company being bought usually goes up until it is close to the price that was agreed upon. Since there may not be much more room to go up, you may want to lock in your gains soon after the acquisition is announced.
When a competitor releases unfavorable news
When a bellwether company in a certain sector misses earnings, it can bring attention to the problems in that sector. If you own stock in a company in that sector, you might want to sell it unless you’re sure that your stock won’t be affected by what’s going on in that sector.
Reasons related to the investor’s own circumstances or choices
When you need the money right away or soon
Most of the time, it’s best not to invest money you plan to need in the next few years in the stock market. But you have every right to sell if you need the money. You might want to buy a house but don’t have enough money for the down payment, so you sell some stock. Investors who are getting close to retirement might sell stocks to reduce the amount of risk in their portfolios. Parents can also sell stocks in tax-advantaged plans that are set aside for specific things, like their children’s education.
When you find better investment opportunities
Assume you find a fantastic purchasing opportunity for one of your favorite stocks and decide to commit 10% of your portfolio to this purchase. If you don’t have 10% of your portfolio in cash, you can consider selling some shares of another company or exchange-traded fund (ETF) you own to free up some cash. The other stock or ETF is probably OK, but identifying an outstanding long-term opportunity elsewhere might be a fair cause to sell.
When it is necessary to rebalance a portfolio
In more than one way, your investment portfolio can become out of whack. This is why most investors need to rebalance their portfolios from time to time, which may mean selling some stocks. These are the two most common things that happen before a stock sale:
Owning a stock that has performed exceptionally well
If you own shares that have gone up in price a lot, your stake in the company may make up a big part of your portfolio’s value. Even though this is a good problem to have, you might not like having so much of your money invested in one company and decide to sell some of your stock.
Trying to lower the risk of your stocks
As you get closer to retirement, it’s a good idea to slowly switch from stocks to safer investments like bonds in your portfolio. One rule of thumb is to take your age and subtract it from 110 to figure out how much of your portfolio should be in stocks. If you have a lot of stocks in your portfolio, selling some of them to move your money around can be a good idea.
Combination of factors
A mix of intrinsic and extrinsic variables may prompt the decision to sell a stock or equities in various instances. Assume you lose your work due to a business restructure and are a few years away from retirement. You’ve been concerned about the markets’ higher levels and historically high valuations, but you’ve had little desire to act on it. However, you would like to save your cash in order to use it in the business that you have always wanted to establish. In this situation, your choice to sell is supported by both intrinsic (your lifestyle shift) and extrinsic (markets’ increased levels/values).
