3 Good Reasons to Sell a Stock and 3 Bad Ones
If you’ve dabbled in the stock market, you know that it can be tricky to decide what the right time is to sell. Your stock may be up by 20%, 50%, or even 100% – but that’s not always an indication to sell. Even if your stock is down, it’s not always the right idea to take your money and run before it presumably “gets worse”.
You may have heard the advice that says contrary to that, but while there are legitimate reasons to sell your stocks, them facing a loss isn’t one of them. Stocks are very volatile and can fluctuate at the drop of the hat. They can be affected by a plethora of things from a billionaire’s tweet to a global pandemic – so it’s better to wait it out in the short term to see if it gets better.
On the other side of the coin, a stock that has shot up in value is also not always a sign to sell. In theory, stocks have unlimited potential to increase, which means that they can increase way past your target price. Assuming you have gone through the trouble of researching the company and maybe even going through their financial statements, you could afford to wait it out a bit more.
You should also know that selling stocks can affect your tax returns, so you can consult with a tax advisor before selling them just to be safe – at least until you become acquainted with capital gains tax rules.
So, if you are still confused about whether you should sell your stocks or not, don’t worry, we’ve got you covered! Here are 3 instances where it’s a good idea to sell and 3 when you should not.
3 Good Reasons to Sell
You Need the Money
If you started investing for a very particular reason, say to earn enough money to build an emergency fund or for a major lifestyle purchase such as buying a car or house – then it’s time for you to sell. If your investments have worked and you have achieved the original goal you’ve set, then that’s a good reason to say bye-bye to the stock market.
This is especially so since the stock market is unpredictable and is always at risk of backing off. If that happens, it could delay or even prevent you from enjoying all those hard-won gains.
Something About the Stock Changed
When you invest in a company, you would assume that you’d get to be a part of the industry that the company is a part of. In case this changes – like if Apple suddenly decides to stop selling phones and start selling actual apples instead – it is an indication that it might be time to beat a hasty retreat. Who knows? Maybe the company will thrive in its new market, but that the chances of them doing are realistically not as high as them continuing to perform well in the business that they were already performing well at.
The same could be said for mergers and acquisitions. Companies that are going through such changes will promise you the moon and the stars, but past experiences have shown that that’s not always the case. If the company you own stock in goes through a major acquisition or merges with another company, it’s no longer the same stock you owned earlier.
The Stock Didn’t Do as You Expected
Like we explained in the previous section, stock or a company that doesn’t follow your expectations should be on the chopping block. For instance, if you bought stock in a company expecting that they were going to introduce a hot new product, but it didn’t turn out to be as great as you had projected, it’s time to put in that sell order. If the company commits fraud – SELL!
When we say this, it’s not talking about pure monetary value alone. In fact, an underperforming stock that you have faith in has a good reason to stick it out. However, if you are in the stock game to earn short-term income, dividends are probably a big deal to you. So, if a company cuts dividends or stops paying them, it may be time to sell.
But when doing so, keep in mind that the stock could recover or even increase its value higher than earlier – so be ready to face some disappointment. If you decide to sell a stock while it’s down, you may need to learn to take your losses, learn your lessons, and move on.
3 Not-So-Good Reasons to Sell
It Feels Good to Take a Stock Market Profit
Good ideas aren’t easy to come by, so when you do catch a big fish, don’t be so eager to throw it back – even if it does mean you’ll earn a hefty profit. You never know whether the next thing you reel in is a fish or an old soggy boot.
More importantly, what will you do with the profit? Spending it means you’ll have less money to invest, and even that could turn out to be a disappointment. Keep in mind that if your stock has reached your target price, it also has the potential to rise even further.
You Have a Hunch
As humans, we are always fighting between our impulses and rationale. While the former can be a great tool to help you survive many of life’s obstacles, the rationale should always be given more weight when it comes to trading in the stock market.
Any experienced investor will tell you that discipline and careful consideration – not emotion – is key to making sure you continue to make money for an extended period of time. No one likes losing money (or feeling left out), but put your feelings aside and deliberate whether buying or selling that stock is a good idea.
Online (or Offline) Buzz
The internet can be a great resource to budding investors but not everything is as great as it seems. There are so many smart people offering great advice for free on blogs, bulletin boards, and sites such as Reddit, but there are so many more people who only seem to sound smart! It can be difficult to distinguish between the two, and you don’t want to end up losing money, so it’s always best to take any buzz around stocks with a grain of salt.
You should also be wary of another internet phenomenon that psychologists call “feedback loops”. This is basically where enough people share a belief that makes more people jump on the bandwagon. They may think that if so many people believe in it, it has to be true. When it comes to stocks, the reality could be very different, which leaves you in a race to exit before the stock plunges down a deep well.
This list is only a starting guide to help you figure out the building blocks of your own investment philosophy. Every investor learns to develop their own style over time. Some may buy shares in companies when the stock is facing a downturn while other focus on companies that are growing rapidly. Based on this, they will learn to decide when it’s the right time to sell and when it’s not.
As you progress in the stock market, you’ll develop your own buy and sell signals. Keep in mind that good stocks may underperform for a period of time (even years), while some other growth stocks may fizzle out as quickly as they sparked up. It’s up to you to decide what you want to do.
One thing you should not do is keep switching strategies. If you’re patient, consistent, and smart, you can reduce your risks and earn a hefty profit while you’re at it!