WHEN TO SELL STOCKS
WHEN TO SELL STOCKS
This is the million dollar question. There’s no definitive answer to it either, but here are some tips and factors to consider when pondering whether or not its time to sell. (Keep in mind that when the opposite of the buying situation occurs, those are also "sell" triggers.)
AS SOON AS IT HITS YOUR PROFIT TARGET
This was covered in the example at the beginning of the chapter but it is repeated here because of how crucial this is. Don’t succumb to greed and stick to your rational decision-making, so you can avoid losing money as Frank did on the Shampoo Company. You can stick to this discipline by locking in your profits. By creating a trailing or regular stop order. We’ll go into this a bit more in the “making a trade” chapter.
THE FUNDAMENTALS HAVE CHANGED
Has the company had major changes in leadership, product underperformance, or major changes to sales, profit margins, or cash flow? If so, it might be time to sell. You should always keep track of these to predict a fall in the stock price before it happens. (SprinkleBit’s activity feed is a great place to track this)
[Extra Credit] it is helpful to look deep into financial statements, especially the footnotes as it is here that issues can most easily be spotted before it becomes public knowledge.
Creating news alerts for your company can also help you stay on top of what happening as well because you can stay up to date on any changes in order to react as needed. At the end of the day, a little extra attention could end up saving you a tremendous amount of money.
AFTER A MERGER OR ACQUISITION
On average, the price at which a company is bought out is 20%-40% higher than the stock currently sells for, thus the investor holding the stock has lucked out and it may be time to sell after this announcement. Sometimes it makes sense to keep the stock in the acquiring company if it cadmian benefit tremendously from the newfound partnership and their synergies. However, it may take many months, and there may be better opportunities elsewhere, which brings us to our next tip...
WHEN THERE IS A BETTER OPPORTUNITY
Opportunity cost, or the lost earnings of picking one investment instead of another, higher performing one, is real. Unfortunately, money is a finite resource, so we oftentimes have to choose between one investment and another. If you have your eyes on a stock that you think will outperform the one you currently own over a period of time, it may be time to sell. It is difficult to ascertain with absolute certainty the opportunity cost, but this is where the risk comes in and judgment calls are made.
If a company files for what’s called chapter 11, it’s on the verge of bankruptcy and your investment may be at risk. If you then sell the shares at a loss, it will at least offset future capital gains for tax purposes.
That being said, when you sell a stock at a profit, remember that you are locking in gains, not losses. Sometimes, the stock may rise after you sold it and it will sting, but there are always more opportunities to be found. Make sure to stick to your original strategy and make rational decisions, while keeping the tax impact in mind, when selling!