We come across a bunch of articles and blogs telling us why and how to buy stocks, but many of us ignore an important part of the same, ie., when to sell a stock? One of the mistakes almost all the investors make is selling a winning stock very early, or a losing stock very late. We do not get to know when exactly is “very early” or “very late”.
For instance, when I had just started investing and was slowly getting to know more about the stock market, I had purchased a stock at $35. I also told myself that I would sell it off when the price touches $40. What happened next was something very common and a natural human tendency. The stock hits $40 and then I decided to hold it out for a couple of more points. Surely, the stock reached $42 and my greed continued over rationality. So I decided to hold out for a little more. Suddenly the stock price took an abrupt turn downward and was back at $39. So I calmed myself down, told myself that once the stock hits $40 again, I would sell it off for sure. Unfortunately, this never happened and the stock price continued to drift lower and lower with time. Surrendering to my emotions and frustrations, I sold the stock at $32, below my initial buy price.
So greed and emotion overcame a sensible rational judgment, sound investment principles were replaced by casino-like tendencies. It became more of gambling and not investing. The initial result was a loss. And while the investment lost was $2 a share, the true loss was $8 because I had the opportunity to sell at $40, but I didn’t. So, we can consider selling our stocks when our original investing thesis has busted out. Indeed, buying a stock at the right price may ultimately determine the profit gained, but selling the same stock at the right price guarantees the actual profit.
In order to solve this problem, we can set an upper limit that triggers our sale. The underlying reason here is that we may be afraid that the stock will have a difficult time supporting a market price above a certain level and any hint of bad news will send the price into a descent. On the other hand if the price has reached the expected levels, we can sell it and move on to a newer opportunity.
Well, though there is no “perfect” time to sell a stock, it would be profitable to keep a few things in mind. They may help us avoid heavy losses and also welcome some crazy profits!
Eliminating Dividends – A very important hour when we need to remind ourselves that it just might be the correct time to sell our stocks can be when a company starts cutting or eliminating its dividends. Dividend cuts are serious events and also signals financial difficulties that all of us should pay close attention to.
Sudden hype in media – It is also very thoughtful to watch out for hype. If a stock we own becomes the prime focus of media and receives a lot of attention and buzz, it can just be the right time for us to look at taking a profit. This type of stock-feeding frenzies attracts most of the inexperienced investors who bid up prices, only to have the stock price collapse when the hype dies. If we’re not careful enough, we might get to watch the price fall right past our profits.
Expected Growth – When the stock we have invested in stops growing or the growing begins to slow down, maybe it’s the right time to move on. In this case, valuation may not be as precise as we’d like, because the future growth is uncertain.
Hunt for a better opportunity – At times we also need to remember that there are other stocks that may provide a better opportunity with a lesser amount of risk. Just because we have a good stock with a nice profit, doesn’t mean we should stop looking for a better deal. So before owning a stock, we can always compare it with the potential gains that could be obtained by owning another stock. If the alternative is better, it really makes sense to sell the current position and buy the other.
The bottom line is that the decision to sell a stock is what decides the extent of profit or loss. There are a quite a number of considerations that we need to make in order to fulfil our purpose of investment. Buying a stock at the right price is vital. But we don’t quite know the ultimate return of an investment until we sell it. Therefore, selling is vital. So let us get started with investment today, keeping in mind how we are going to sell it off tomorrow!