It's always difficult to determine the proper time to sell a stock. What if you sell and the stock price increases dramatically? Or what if you hold onto the stock and its price declines? To help you decide when to sell, consider these signals:
- The price of a stock with a larger loss isn't moving. Investors hate selling stock at a loss, often wanting to hold on until they at least break even. However, just because the stock's price was much higher in the past doesn't mean it will hit that price anytime soon. You may want to sell and reinvest in another stock with better prospects. To help make that decision, forget what you paid for the stock. Instead, analyze it at its current price, deciding whether you would purchase it now at that price.
- The stock has hit your target sell price. When you purchase a stock, set both high and low target sales prices. While you don't have to sell when the stock hits those prices, you should at least review it at that time. You might want to set rigid rules for selling a stock when it declines by a certain percentage of your purchase price, to ensure you don't incur substantial losses. Many investors find it emotionally difficult to sell a stock at a loss, so this rule takes the emotion out of that decision. Keep in mind that capital losses can be offset against capital gains, and an excess of $3000 can be deducted against ordinary income. Any remaining capital losses can be carried forward indefinitely.
- Your stock's performance is lagging the market or its industry. Compare your stock's performance to that of other stocks in the same industry and to the overall market. Keep in mind that your stock's performance will vary over time, depending on the stage of the market cycle and how your stock's industry is performing in that cycle. Consider selling a stock that has lagged in performance for an extended period.
- The stock's fundamentals have changed. The world is constantly changing and the market leaders of today may not be the market leaders of tomorrow. Thus, watch your stocks so you can spot when fundamentals may be shifting.
- The stock is subject to negative news stories. You shouldn't sell a stock at the first sign of trouble, since it's not unusual for a stock to go through a difficult period. But if the news is continuing and involves significant events like management shakeups, major competitors stealing market share, unwelcome mergers and acquisitions, or top executives selling large blocks of stock, it's time to reevaluate the stock.
- The stock's price has run up too much, too quickly. While this is a good thing, the price could have risen so significantly that you may not think it has the potential to increase much more in the future. At that point, you may want to sell and purchase another stock with better prospects.
If you have difficulty implementing your sell strategies, call for a second opinion. Often, discussing your thoughts with someone else causes you to consider other factors or helps ensure your reasons for selling are valid.