How to Know When to Sell Your Stocks

Santri Alat - How to Know When to Sell Your Stocks - While quite a bit of time and research goes into selecting stocks, it is often hard to know when to pull out – especially for first time investors. The good news is that if you have chosen your stocks carefully, you won’t need to pull out for a very long time, such as when you are ready to retire. But there are specific instances when you will need to sell your stocks before you have reached your financial goals.

You may think that the time to sell is when the stock value is about to drop and you may even be advised by your broker to do this. But this isn’t necessarily the right course of action.

Stocks go up and down all the time, depending on the economy…and of course the economy depends on the stock market as well. This is why it is so hard to determine whether you should sell your stock or not. Stocks go down, but they also tend to go back up.

You have to do more research, and you have to keep up with the stability of the companies that you invest in. Changes in corporations have a profound impact on the value of the stock. For instance, a new CEO can affect the value of stock. A plummet in the industry can affect a stock. Many things – all combined – affect the value of stock. But there are really only three good reasons to sell a stock.

The first reason is having reached your financial goals. Once you’ve reached retirement, you may wish to sell your stocks and put your money in safer financial vehicles, such as a savings account.

This is a common practice for those who have invested for the purpose of financing their retirement. The second reason to sell a stock is if there are major changes in the business you are investing in that cause, or will cause, the value of the stock to drop, with little or no possibility of the value rising again. Ideally, you would sell your stock in this situation before the value starts to drop. 

If the value of the stock spikes, this is the third reason you may want to sell. If your stock is valued at $100 per share today, but drastically rises to $200 per share next week, it is a great time to sell – especially if the outlook is that the value will drop back down to $100 per share soon. You would sell when the stock was worth $200 per share.

As a beginner, you definitely want to consult with a broker or a financial advisor before buying or selling stocks. They will work with you to help you make the right decisions to reach your financial goals.

When to sell a stock

1. You’ve found something better

Investing is ultimately about earning the highest rate of return possible while taking on a minimal amount of risk. As business characteristics and market prices change, investing opportunities change with them. If you own a stock, but find another investment — perhaps another stock or something else entirely  that you find more attractive, it could make sense to sell what you own in favor of the better opportunity.

2. You made a mistake

Mistakes happen, and the sooner you realize it the better. Sometimes it turns out that a business isn’t what we thought it was when we purchased the stock. Maybe it faces tougher competition than you thought or its positioning is getting worse, not better.

British economist John Maynard Keynes famously said that when the facts change, you should change your mind. Admitting mistakes can be hard, but you’ll be better off as an investor if you can realize them quickly and get out of your position.

3. The company’s business outlook has changed

Businesses are dynamic and their future success is far from guaranteed. Companies that earn high returns on capital often face stiff competition that could bring their returns to more normal levels. Other times, businesses face total disruption from new innovation that threatens the company’s very existence.

Traditional bookstores’ fortunes changed virtually overnight with the arrival of Amazon in the 1990s. If you had owned stock in Barnes & Noble or Borders Group back then, you would have been wise to sell your shares in advance of the eventual deterioration in the business.

4. Tax reasons

If you have losses in some of your investments, you may want to consider selling them to take advantage of a strategy known as tax-loss harvesting. This approach allows you to save on your tax bill by offsetting income and capital gains with your losses.

The IRS allows you to claim up to $3,000 in net losses each year, which could save you a good chunk in taxes. If your net losses are beyond the $3,000 limit, you can carry over the additional losses to offset gains in future tax years. This strategy only makes sense in taxable accounts, not in retirement accounts such as 401(k)s or IRAs.