When Should I Sell a Stock?
Selling a stock is just as important a consideration as buying a stock. There are several reasons why you might want to sell; you may feel that the profit you have made from the stock is sufficient for your purposes and wish to bank the gains, you might have lost faith in a company or sector and wish to hunt for profits elsewhere, or you may need to raise capital and look to sell your holdings.
Either way, here are some factors to consider before selling your shares -
Refining Your Portfolio
There are a variety of reasons that a portfolio might become unbalanced or does not suit your investing goals. You have maybe concentrated your portfolio too heavily in a particular sector and feel you need to diversify to avoid becoming exposed if that sector experiences a downturn.
Diversifying your portfolio can limit the chances of you losing everything at once, but at the same time, if you over-diversify, you can hamper your portfolio's ability to grow.
Reacting to Poor Performance
Selling because of a bad quarter or a tough period is one of the worst reasons to sell an investment. Many investors who panicked and sold stocks in one of the financial crises of the last 20 years lost significant sums of money that they would have saved if they had stayed invested. If the financial climate is on the back foot, or a quality company is experiencing a temporary blip, or even a cyclical sector is in a periodic downturn, this may not be good time to sell and future profits can be lost when the sector bounces back. However, some investments simply aren’t worth sticking with in the hope that they will eventually turn a profit. Some companies are simply poor investments, and you need to look at its future potential relative to its past performance, but sometimes you just have to cut your losses and move on to find more successful investments.
However, assuming you’ve done due diligence and research and an investment is fundamentally sound, bad quarters are when you should think about buying more. Share price dips in the price of a solid company can be caused by any number of factors unrelated to the company's performance, such as a sector-wide correction, a bear market, rumours, or investor panic and so forth. Consider these options when taking the decision to sell a stock.
If you react after a bad quarter or a market panic, you may be reacting to old information where the damage has already passed and a strategy for repairs is already underway. A little bit of patience and nerve will go a long way toward strengthening your portfolio and your success as an investor.
Freeing up Capital
Another reason to sell an investment is to free up capital and the best way to free up capital is to realise losses to offset your gains. If you have two investments—one that has been successful and another that has suffered losses—you may consider selling them both to avoid having an overall profit that is subject to capital gains tax.
If the need to release capital is urgent, don't let taxes prevent you from selling. If your only other option is a loan, then you are better off to pay the tax and avoid years of high-interest debt payments. Make sure you understand how much you will be paying in taxes and fees to ensure that you will have the amount you need when the sell trade is complete.
Summary
The process of selling an investment is akin to buying one —you have to make sure it is in line with your investing goals and then do your due diligence. Once you are satisfied that you are making the right decision for the right reasons, such as balancing your portfolio or freeing up needed capital, you will need to consider minimising transaction costs and taxes. Finding a good discount brokerage to work through can help reduce fees, and your taxes can be kept in controlled by simultaneously realising gains and losses and releasing specific shares. Investing is not just about knowing when to sell, but why and how to sell.
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