When To Sell Stocks: How To Know The Right Time

Key Takeaways


Investing in stocks is like a game of chess, and that is part of the fun. However, you’ll always want to have a good idea of when to get in and when to get out, so that you don’t get burned. Although there are no hard and fast rules, here are some general tips on when to sell stocks, along with when not to sell.


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Best time to buy and sell stock

The 10 Best Times To Sell Your Stock

Making money is the end game of stock investing. In order to win big, you have to know when it’s the best time to buy and sell stock. You can maximize your profit by executing these decisions at peak ripeness. However, this is something that’s easier said than done. It’s human nature to want to hold out and wait for an even better time to sell stock, but that moment may never arrive again. To help with your decision-making, here are 10 of the best times to sell your stocks:

  1. When You Hit Your Price Target

  2. When Business Fundamentals Decline

  3. When There Is A Better Opportunity

  4. After The Company Is Acquired For A High Premium

  5. After The Company Goes Bankrupt

  6. If Purchasing The Stock Was A Mistake

  7. If The Stock Price Rises Significantly

  8. When The Company’s Valuation Is Higher Than Its Peers

  9. When You Need Emergency Funds

  10. When You Need To Rebalance Your Portfolio

1. When You Hit Your Price Target

Always quit while you’re still ahead. Experienced investors are successful because they know how to set their emotions aside. One of the best things you can do for yourself is to set up a price target. Once you hit that target, it’s time to sell your stock no matter what. That way, you’ll lock in a solid profit.

If you let your emotions get the best of you and you find yourself holding out for a higher price point, you expose yourself to risk. One day the stock price could be going up, and it could turn on you the next. You’ll have lost your profit opportunity in one fell swoop, which you would have avoided had you stuck to your gameplan. A seasoned investor would advise you to pick out a range, instead of a single price, to provide some flexibility. A good place to start is to wait for your stock to double in price.

2. When Business Fundamentals Decline

When you own company stock, you’ll want to keep a close eye on that company’s business performance. That way, you’ll be one of the first to know if their business fundamentals start to decline. Some key measures to track include sales volume, profit margins, and cash flow. You can keep your pulse on these things by reading business news, and investing services typically provide business reports and analytics as well. (Check out our guide on the best investment apps to see what other services are offered.)

Experienced investors who want complete control may find themselves deep-diving into company financial statements on their own.

In addition to financial measures, you’ll also want to monitor your company’s general public relations. Anything that might harm that company’s reputation, such as fraud, or general behavior and conduct of high-profile executives, may be a cause for your stocks to plummet. It’s best to get out by selling stocks when you catch a whiff of foul play.

3. When There Is A Better Opportunity

If you want to be a successful investor, then you have to be an opportunist. Investopedia defines opportunity cost as the profits you will miss out on when you choose one option over another. Buying and selling stocks is innately a game of measuring opportunity cost at all times. You want to minimize your cost by going for the option that will render you the most benefit.

Before you even buy a stock, you’ll want to spend time researching and evaluating different options before choosing the best one. However, that doesn’t mean that your selection will be the strongest performer at all times. Your initial stock could start underperforming, or perhaps there will be a dark horse that takes you by surprise and starts performing well. There is no shame in jumping ship and going for the better option.

4. After The Company Is Acquired For A High Premium

When a company announces a merger or acquisition, it’s time to move fast. Stock prices typically spike when a company is being bought out for a premium. It’s a great time to sell your stocks and lock in your profits. Experts say that the average takeover premium can range between 20 and 40 percent.

Not only will you benefit from the premium prices, but you’re also getting out before uncertain times. Mergers and acquisitions can be great for a company’s future, but it can also be terrible if the deal falls through, or the sudden shift in structure causes performance to deteriorate. Further, mergers can take months to complete. You may be better off selling your shares and finding an alternative investment.

5. After The Company Goes Bankrupt

This may seem obvious, but bankruptcies are a definite signal that it’s time to sell. A company that goes bankrupt essentially loses all of its value to shareholders. You will most likely experience a significant loss in the value of your stock, but it’s better to sell it for something than hold onto something worthless.

If you’ve been doing your homework and stayed on top of tracking your company’s business performance, you’ll ideally jump ship before others catch wind of the impending bankruptcy.

6. If Purchasing The Stock Was A Mistake

No investor has a perfect scorecard. Throughout your investing career, you can and will make mistakes. Don’t be too hard on yourself when you do make mistakes; investing is based on speculation at best, and there’s no exact science behind it. You can treat mistakes as opportunities to learn and get better.

If you did your research but find that you bought stock as a mistake – sell! Even if it means you’ll lose out on some money, it’s better to sell your stock as soon as you recognize your mistake and put your funds somewhere else. The best thing you can do for yourself is to minimize the costliness of your mistake and to pivot quickly. Don’t be stubborn by holding on to a weak performer.

7. If The Stock Price Rises Significantly

If the price of a stock you own starts spiking dramatically, sell, sell, sell! You should remain humble and feel lucky that you happened upon a golden egg. It’s best to keep your emotions steady, collect your gains, and move on to the next opportunity.

Investors who get emotional often make the mistake of holding out. They do this because they think they’ve outsmarted the market, and they want to see if the stock prices will increase even more. This is something that can happen, but more often than not, they’ll be sad to see the prices starting to drop again. Upticks in stock prices are typically based on speculation and are very temporary in nature. If you believe in the company, consider selling your stock and then buy again when the prices drop.

8. When The Company’s Valuation Is Higher Than Its Peers

Investors often choose to sell when a company’s valuation becomes higher than its industry peers. Valuation is essentially how much you think a company’s future cash flows are worth today. Because the future is uncertain, valuation always involves a margin of error. Selling stock for valuation is an advanced technique, but the rewards can be large when you’ve gotten the hang of it.

9. When You Need Emergency Funds

At times, you’ll find yourself needing to sell your stocks for personal reasons, regardless of market performance. Stocks are assets that can be liquidated into cash in times of need, such as a personal emergency. Other reasons investors sell off their stocks include buying a home, paying for college, or even buying an engagement ring.

If you feel like you are having a hard time, emotionally, try to remember why you started investing in stocks in the first place. Most likely, you did so to build wealth and increase your buying power. Ideally, you’ll be selling your stocks because you’ve arrived at a milestone in life that you were saving up toward in the first place. You can always start fresh and buy a new set of stocks again!

10. When You Need To Rebalance Your Portfolio

Last but not least, you may find yourself selling stocks when you need to rebalance your portfolio. You’ll always be susceptible to risk, but you can mitigate that risk by having a good mix of investments in your portfolio. A ‘good mix’ can be represented by a wide variety of things, but for example, you could invest in several different industries, types of funds, or even by adding commodities to the mix. (Did you know that you can invest in commodity funds? Read more here!)

By diversifying your portfolio, you’re spreading out your risk. If an unforeseen event occurs and one of your stocks begins to tank, you’ll be thanking yourself that you didn’t put all your eggs in one basket.

When to buy and sell stocks

When You Should Not Sell Your Stock

This guide focused on the best times to sell a stock, but it’s also important to know when not to sell your stock as well. It’s best not to make your investment decisions based solely on fluctuations in stock prices. You’ll always want to keep the bigger picture in mind, and always maintain balance.

For example, you’ll notice that we never urged you to sell just because the price went up. Rather, we advised you to set a price target range that you want to hit before selling. That’s because all too often, investors scramble to sell as soon as their stocks jump up in price. However, they’ll be sad if they find that those stock prices increased because the company still had growth potential.

Summary

Knowing when to sell stocks is both an art and a science. There are great reasons to sell, great reasons to buy, and great reasons to hold on and weather the storm. The hardest part is being able to identify these reasons and knowing which strategy to go with. It’s best to approach investing with a calm mind and to keep your emotions out of the game as much as you can. Moreover, you can even try being draconian. Historically, investors who practice discipline tend to have the most success in the long-term. It’s completely normal to make some mistakes along the way. Don’t beat yourself up about it, take the lesson, and keep moving on. Stocks are inherently fluid, which means that you’ll stress the least by practicing flexibility yourself.

Can you think of any other times that you should sell a stock? Share in the comments below!

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REITs & Stock Investing
REITs & Stock Investing
REITs & Stock Investing
REITs & Stock Investing
REITs & Stock Investing
REITs & Stock Investing