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 on to the stock and its price goes nowhere or declines? To help you decide when to sell, consider these signs:
- The price of a stock with a large loss isn't moving.
Investors hate selling a stock with a loss, often wanting to hold on until they at least break even. However, just because the stock sold at a much higher price in the recent past doesn't mean it will hit that price again 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 today 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 can take the emotions out of that decision. Keep in mind that capital losses can be offset against capital gains, and an excess of $3,000 can be deducted against ordinary income. Any remaining capital losses can be carried forward indefinitely.
- 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 or 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 event, 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.