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To profit from the financial markets, you must know when to buy securities like equities and mutual funds and sell them at the right time. But because of extreme volatility and the unpredictable nature of the stock market, it is nearly impossible for an investor to execute both these decisions correctly. When to buy and when to sell a stock is a million-dollar question. If you can crack this, you are hailed as a genius.
Finding and buying stocks by looking at the ongoing market situation might be easy. Still, there remains a high probability that any stock you purchase might retreat in the next moment, thereby causing generating losses in your portfolio.
Selling stocks, on the other hand, is a lot more complex. If you sell them too early, you miss out on the gains. If you sell them too late, your capital is eaten up.
The right time to sell a stock depends on two factors:
- Your investment strategy.
- The prevailing economic conditions in the market.
Investors who have wealth appreciation as their motive, therefore, prefer to invest for the long term rather than speculating on short-term profits.
Beginners Guide: When To Sell A Stock To Obtain The Maximum Profit?
- Selling of Stocks
- Things to remember before selling a stock
- When not to sell a stock
Selling of Stocks
Determining when to sell a stock is tricky, as predicting when it has reached its peak potential takes work. Analyzing stocks using fundamental analysis or technical indicators might help, but it is insufficient. So, apart from beginners new to investing, even the most seasoned traders have unrealized gains of around 20-25% in normal market conditions.
Some intrinsic reasons relating to the stock itself or the market, coupled with extrinsic reasons like the investor’s finances and lifestyle, can trigger sell decisions. Human emotions and psychology also hamper making intelligent investment decisions. However, most investors face a problem: they need a proper exit trading strategy.
Here we have mentioned a few instances to help you decide when to sell a stock. While investing in stocks is essential, it is also crucial that you make a successful exit.
1. Change in the company’s conditions
The most common factor that indicates a sale is when the conditions that made you buy the stock no longer apply. This reshapes your overall investment thesis. Some instances often change the comprehensive fundamental analysis of a company for which it becomes essential that those stocks are disposed of. Investors need to look for such signs continuously.
A few instances that depict a change in economic conditions are mentioned hereunder:
• Decline in the company’s sales growth
• Decline in the company’s valuation or share price
• Emergence of a competitor offering superior products at a lower price
• A change in senior management
• Company assuming too much debt
2. Mergers & Acquisitions
A company announcing its acquisition by another entity is another scenario that sends a selling signal. This is because shortly after an acquisition is revealed, the target company’s stock price converges on the pre-negotiated purchase price. Above that point, its upside potential is substantially constrained. Investors must lock in their profits as soon as the transaction is revealed.
Moreover, how the acquisition takes place also affects the buying and selling decision. Acquisitions can be made with cash, stock, or a combination. For those made in cash, the share price rises toward the acquisition price but falls sharply if the deal still needs to be completed on schedule. Therefore, it is necessary to sell these shares much sooner. Again, for the other two methods, the choice will depend on your desire to own stock in the acquiring company.
2. Better investment opportunities
There can be several instances when the investor has run out of cash and an attractive investment opportunity has been rolled out into the market. In such cases, you may sell a stock and use that cash to invest elsewhere. Such decisions come into play when attractive long-term investment opportunities that can pay off better, in the long run, start making appearances.
Things to remember before selling a stock
1. Assess companies on their own merits
Selling stocks based on a certain percentage of fall in the market is not a prudent decision in all cases. Rather than solely deciding based on the broader market conditions, you should assess individual stocks or companies based on their own merits like earnings per share, liquidity, valuation, balance sheet health, etc., as many stocks often outperform the market.
2. Look beyond the near-term volatility
Selling good stocks based on market happenings is not always a fair practice. Anyone who intends to grow their wealth should look beyond the near-term volatility. If you are convinced about the earning prospects of a company and the price of that share of stock falls, it might be an opportunity to accumulate such stocks at a discounted price. On the other hand, if a permanent weakness in a company’s earnings is noticed, one must be bold in disposing of that stock.
3. Stop Loss
Anyone who trades must trade with a strict stop loss. If a company’s long-term prospects are significantly bleak, one has to reassess their investment thesis again. You have to determine if it is still prudent to hold that stock or whether it should be immediately disposed of.
4. Portfolio Rebalancing
Investment portfolios can become unbalanced many times. At such times it is necessary to rebalance the portfolios, which may involve selling some stocks. Suppose a stock is risky but performs well and represents a significant part of the portfolio. In that case, the investor might sell off a part of his holding if he wishes to reinvest that money in safer investment options.
When not to sell a stock
One should sell stock only after proper analysis. There are moments when selling might seem viable, but it might be wise to avoid them. Some of those instances are:
- Selling stocks soon after they have started to rise can bring unrealized gains, as most growth stocks often keep rising.
- Selling stocks just after their price has started falling is not always a good decision for the same reason.
- Selling stocks at a loss to save taxes can erode capital and is not an intelligent way of tax saving.
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