Tuesday, September 06, 2011

How Do We Know When To Sell Stock?

Often investors will sell their best stocks and hang on to their losers.  It’s human nature to try to avoid losses and by not selling a poor performing stock you can convince yourself you haven’t really lost anything – and if you hang on, it should bounce back, shouldn’t it?  Some people will sell if a stock really shoots up so they can take a profit.

So how do you know when to sell stocks, if ever?  Even die-hard buy-and-hold investors should watch for signs.

Buy and Hold means
The investment strategy of purchasing securities and holding them for extended periods of time. Investors using the buy-and-hold strategy select companies on the basis of their long-term outlook. Such investors are not influenced by short- or intermediate-term movements in the price of a security.

Set a Target Price

When you buy a stock, do some research and establish a realistic target for growth.  For example, you could set a target for a 50% increase in price.  When you have reached your target, follow through.  This is especially true with speculative stocks like junior mining companies.  Set a “sell-half” rule – when the stock doubles, sell half of your holdings. 

Sell Before You Buy

For every stock you add to your portfolio, sell one you already have.  This discipline forces you to review your holdings objectively and ferret out the losers.  This is an easy method to determine when to sell your stock.

Sell Your Stocks When the Market is Up, Not Down

While this sounds obvious, it’s usually against the pack.  Sell when everyone else is buying.  It sounds easy, but it’s tough to do.  Also, if several brokerages recommend a stock, it’s probably time to unload it.  The price always reflects popularity.

Monitor Even Your High Quality Stocks

Sometimes they can reach an unsustainable price level due to rumors, such as a take-over bid, but it can be anything.  If there is any question of lack of integrity within the company’s management, sell immediately.  If dividends are reduced or even eliminated, it may be the time to sell your stock.  Investigate the reason.

If you stick to stocks with a stable history of dividends and earnings you will become less inclined to sell.  Never sell simply on the basis of an unexpected price drop.  Revisit the reasons you bought the stock and if they are still valid, ride out the downturn.  Be disciplined and don’t get emotional.

The costs of selling – brokerage fees and capital gains tax – often outweigh the benefits, even if you are selling at a profit.

It’s always difficult to sell a stock.  If you didn’t believe in it, you wouldn’t have bought it in the first place.  Analyze your holdings.  Never let sentiment get in the way.  Make a thoughtful, rational decision when to sell your stock.

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