When
is the best time to sell a stock? The answer to that question is often
as difficult and individual as deciding when to buy a stock.
There are several ways to look at the question and you can roughly divide them into two main categories:
• Personal reasons
• Market reasons
In this two-part series, we’ll look at the reasons you might want to sell a stock.
Part One - Personal Reasons
In this first part, we’ll examine some personal reasons for selling a stock. The second part of the series will focus on more market-driven reasons for selling. However, there will be some overlap between the two.
• Risk Tolerance Reached
You bought a company that looked like a steady growing concern, but instead it has turned out to be a roller coaster ride. For whatever reason, this stock is just too volatile for your nerves. Dump this firecracker and replace it with a stock that will let you sleep at night.
• You Need some Cash
An unexpected major bill can sabotage anyone’s budget. Using a stock, especially one that is underperforming, to solve a financial emergency is another reason to sell. However, take a close look at your personal finances. An emergency cash fund that is not tied up in investments is recommended to avoid, except in extreme cases, liquidating stocks to pay bills.
• Moral, Ethical Conflicts
More and more investors are becoming concerned about the social, environmental, ethical and moral standards of the companies they own. You may decide that a company you own has practices or products that conflict with your social, religious or moral beliefs. There is no better reason to sell if that is important to you.
• The Grass is Greener
This overlaps with market reasons to sell, but there is nothing wrong with dumping an underwhelming stock for a company that offers better returns. The danger here is that active trading can generate significant transaction costs and taxes, both of which eat into any potential gain. Look (and think) before you leap.
• You’ve Reached your Goal
It worked. Your plan to reach that financial goal, whether it was retirement or getting a child to college, is finally here. Now is the time to start systematically liquidating those stocks you’ve tagged for this goal. If you have been trading, make sure you have owned the stock at least one year before selling so it falls under long-term capital gains tax rules.
Conclusion
There may be other personal reasons to sell that are just as valid as these are. Before you sell, consider all the alternatives and consequences. There is nothing wrong with admitting a stock is not working for you and moving on.
When is a good time to sell a stock? This is the second part of a series that examines when it is a good time to sell stocks.
The first part of this series dealt with personal reasons you might consider when selling a stock.
Part Two Market-Driven Reasons
This second part of the series looks at market-driven reasons you might consider when selling a stock. Some of these may overlap with personal reasons.
• The Stock Drops by x%
If you buy a stock as a trader, rather than an investor (see Are You an Investor or Trader? ), you may set an arbitrary floor for the stock. When the stock falls to this floor, you sell. Many traders set that floor in the 6% – 8% range, depending on the volatility of the stock. They may not be happy about a small loss, but they make sure it doesn’t become a big loss.
• The Company Flounders
This is the investor’s signal to sell. The investor bought the company because of its fundamentals and its business plan. When something changes and the company loses its way, the investor has to re-examine whether it is the same company or not. Maybe a new CEO takes the company off in a direction that the investor (and market) believes is wrong.
• When a Stock is Over Valued
Can there be too much of a good thing? There certainly can in the market. When stocks are pushed way past their true value, they are often set up for a fall. The strategy is to sell when they are over valued and buy them back after a market correction has knocked the price back down. This, of course presumes an accurate knowledge of the top and bottom of prices – something very few of us are particularly good at with any consistency. Selling an over-valued stock is certainly preferable to buying an over-valued stock. Just be prepared to watch it keep going up after you sell, as happens sometimes. Don’t second-guess yourself; it could have more easily gone the other way.
• Rebalancing Your Portfolio
You have decided that the best allocation for your circumstances is 60% stocks, 30% bonds and 10% cash in your portfolio. Good fortune has smiled on you and your stocks, which are now valued at 70% of your portfolio. As tempting as it might be, your best move is to rebalance your portfolio by selling off some of your stocks and bringing the percentages back into alignment. Obviously, the stock(s) you sell should meet the long-term capital gains test of one-year ownership. Beyond that, look at how your stocks break out and decide which stocks can be sold to keep the diversification intact.
Conclusion
There may be other market-driven reasons to sell that are just as valid as these are. Always consider the consequences (transaction costs, taxes, etc.) before making any decision to sell.
http://stocks.about.com/od/tradingbasics/a/Tosell2021405.htm
Src : By Ken Little, About.com Guide
Collected by : Rajesh Sharma, Jambforum
There are several ways to look at the question and you can roughly divide them into two main categories:
• Personal reasons
• Market reasons
In this two-part series, we’ll look at the reasons you might want to sell a stock.
Part One - Personal Reasons
In this first part, we’ll examine some personal reasons for selling a stock. The second part of the series will focus on more market-driven reasons for selling. However, there will be some overlap between the two.
• Risk Tolerance Reached
You bought a company that looked like a steady growing concern, but instead it has turned out to be a roller coaster ride. For whatever reason, this stock is just too volatile for your nerves. Dump this firecracker and replace it with a stock that will let you sleep at night.
• You Need some Cash
An unexpected major bill can sabotage anyone’s budget. Using a stock, especially one that is underperforming, to solve a financial emergency is another reason to sell. However, take a close look at your personal finances. An emergency cash fund that is not tied up in investments is recommended to avoid, except in extreme cases, liquidating stocks to pay bills.
• Moral, Ethical Conflicts
More and more investors are becoming concerned about the social, environmental, ethical and moral standards of the companies they own. You may decide that a company you own has practices or products that conflict with your social, religious or moral beliefs. There is no better reason to sell if that is important to you.
• The Grass is Greener
This overlaps with market reasons to sell, but there is nothing wrong with dumping an underwhelming stock for a company that offers better returns. The danger here is that active trading can generate significant transaction costs and taxes, both of which eat into any potential gain. Look (and think) before you leap.
• You’ve Reached your Goal
It worked. Your plan to reach that financial goal, whether it was retirement or getting a child to college, is finally here. Now is the time to start systematically liquidating those stocks you’ve tagged for this goal. If you have been trading, make sure you have owned the stock at least one year before selling so it falls under long-term capital gains tax rules.
Conclusion
There may be other personal reasons to sell that are just as valid as these are. Before you sell, consider all the alternatives and consequences. There is nothing wrong with admitting a stock is not working for you and moving on.
When is a good time to sell a stock? This is the second part of a series that examines when it is a good time to sell stocks.
The first part of this series dealt with personal reasons you might consider when selling a stock.
Part Two Market-Driven Reasons
This second part of the series looks at market-driven reasons you might consider when selling a stock. Some of these may overlap with personal reasons.
• The Stock Drops by x%
If you buy a stock as a trader, rather than an investor (see Are You an Investor or Trader? ), you may set an arbitrary floor for the stock. When the stock falls to this floor, you sell. Many traders set that floor in the 6% – 8% range, depending on the volatility of the stock. They may not be happy about a small loss, but they make sure it doesn’t become a big loss.
• The Company Flounders
This is the investor’s signal to sell. The investor bought the company because of its fundamentals and its business plan. When something changes and the company loses its way, the investor has to re-examine whether it is the same company or not. Maybe a new CEO takes the company off in a direction that the investor (and market) believes is wrong.
• When a Stock is Over Valued
Can there be too much of a good thing? There certainly can in the market. When stocks are pushed way past their true value, they are often set up for a fall. The strategy is to sell when they are over valued and buy them back after a market correction has knocked the price back down. This, of course presumes an accurate knowledge of the top and bottom of prices – something very few of us are particularly good at with any consistency. Selling an over-valued stock is certainly preferable to buying an over-valued stock. Just be prepared to watch it keep going up after you sell, as happens sometimes. Don’t second-guess yourself; it could have more easily gone the other way.
• Rebalancing Your Portfolio
You have decided that the best allocation for your circumstances is 60% stocks, 30% bonds and 10% cash in your portfolio. Good fortune has smiled on you and your stocks, which are now valued at 70% of your portfolio. As tempting as it might be, your best move is to rebalance your portfolio by selling off some of your stocks and bringing the percentages back into alignment. Obviously, the stock(s) you sell should meet the long-term capital gains test of one-year ownership. Beyond that, look at how your stocks break out and decide which stocks can be sold to keep the diversification intact.
Conclusion
There may be other market-driven reasons to sell that are just as valid as these are. Always consider the consequences (transaction costs, taxes, etc.) before making any decision to sell.
http://stocks.about.com/od/tradingbasics/a/Tosell2021405.htm
Src : By Ken Little, About.com Guide
Collected by : Rajesh Sharma, Jambforum
