Just as there are no hard-and-fast rules as to when to buy a stock, there are no hard-and-fast rules as to when to sell.
Investors typically spend a lot of their time researching their stock purchases than they spend considering their selling decisions.
Unfortunately, selling decisions are often made in the heat of the moment, after a stock has already taken a beating in the market.
The best way to know when to sell a stock is to know why you own it in the first place.
Don't Sell Based on Price Alone
You will be poorly served if you watch only your stock's price.
When markets go through one of their periodic hiccups, investors who know why they own a stock are less likely to panic and sell after the stock has already tanked. In addition, there are the nasty tax consequences of selling frequently. By making sure every sell decision is justified, you'll inevitably cut down on capital-gains taxes.
Avoiding impulsive selling decisions may be one of the best ways to improve long-term investment returns. While the decision to buy a stock is (or should be) the end result of an extended period of research, the decision to sell is often done in the heat of the moment, after a stock has already been crushed.
But what good does it do to sell after the stock has fallen? Whatever the bad news was, it has already been incorporated into the stock price. At this juncture, investors should ask themselves: why they own this stock. Are the reasons for owning the stock still intact? If so, the more rational reaction to a dropping stock price might be to take advantage of the lower price and buy more. Likewise, investors may actually sell off a gem of a stock just because it has had a great run. But myriad examples show that a great company can outperform the market year after year. The fact is, most of us would be better off if we could block out all those graphs of past stock performance, since they convey no information we can use profitably in the here and now.
Investors typically spend a lot of their time researching their stock purchases than they spend considering their selling decisions.
Unfortunately, selling decisions are often made in the heat of the moment, after a stock has already taken a beating in the market.
The best way to know when to sell a stock is to know why you own it in the first place.
- Did you love the company's fundamentals? Then you should know when they are changing for the worse.
- Was the company the industry leader? Then you should keep a close eye on the competition, and know when it is catching up to your company.
- Did you love the industry? Then you need to watch for an industry downturn.
- Did you buy the stock because it was undervalued? Then you should have a firm idea of what you think fair value is.
Don't Sell Based on Price Alone
You will be poorly served if you watch only your stock's price.
When markets go through one of their periodic hiccups, investors who know why they own a stock are less likely to panic and sell after the stock has already tanked. In addition, there are the nasty tax consequences of selling frequently. By making sure every sell decision is justified, you'll inevitably cut down on capital-gains taxes.
Avoiding impulsive selling decisions may be one of the best ways to improve long-term investment returns. While the decision to buy a stock is (or should be) the end result of an extended period of research, the decision to sell is often done in the heat of the moment, after a stock has already been crushed.
But what good does it do to sell after the stock has fallen? Whatever the bad news was, it has already been incorporated into the stock price. At this juncture, investors should ask themselves: why they own this stock. Are the reasons for owning the stock still intact? If so, the more rational reaction to a dropping stock price might be to take advantage of the lower price and buy more. Likewise, investors may actually sell off a gem of a stock just because it has had a great run. But myriad examples show that a great company can outperform the market year after year. The fact is, most of us would be better off if we could block out all those graphs of past stock performance, since they convey no information we can use profitably in the here and now.
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