There is a ton of information circling the internet about what stocks to buy now. It can be easy to get caught up in the research of picking stocks and finding what you think is the next best investment. However, many investors buy stocks with no exit strategy, so you’re not alone if you’re asking yourself “when should I sell my stocks?”
Below we are going to share reasons you may choose to sell your stocks so you can feel better equipped to make your own investment decisions.
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Refresher: This Is How Stocks Work
When you buy a stock, you’re buying a small slice of ownership in a specific company. Stocks are divided into shares, so when you buy a stock you’re becoming a shareholder within that company.
Some stocks pay dividends, which are a distribution of the company’s earnings given to shareholders. This is a benefit for the investor and you can often choose to reinvest those dividends or simply take the earnings.
Buying And Selling Shares
When you buy and sell shares, you’re doing so through a network of exchanges. It is basically like a big auction house where companies who need to raise capital list shares of their stock on the exchange. Investors like you purchase those shares. All the while, the exchange tracks the supply and demand of those shares which helps determine the stock prices.
The reason investors may choose to buy and sell shares is to make a return on investment. Meaning you buy at “the right time”. Ideally, this means you buy when the stock prices are lower and sell when they are higher so you can secure a return.
Your return can be expressed as a dollar amount or a percentage. For example, most investors are investing for the long term, and historically the stock market has provided a return of 10% each year over the long term (minus 2 to 3% for inflation).
There is never a guarantee with investing, which is why looking at a long-term strategy to build wealth as opposed to buying and selling individual stocks is the more applicable investment approach shared by financial experts.
That said, you may still choose to buy and sell stocks individually and take on the additional risk of buying and selling ‘at the right time’. Generally, investors will want to do so outside of their long-term investments. Meaning, you’ll want to do so in a separate brokerage account and not in your established 401(k) or IRA. Otherwise, you could potentially be missing out on that long-term return of 10% each year. This is also a personal choice, people with a comfort with investing in the market might choose to invest in individual stocks.
When Should I Sell My Stocks? Here’s What You Need To Know
Selling Stocks Is Tricky
Let’s be honest, no one wants to lose money. As humans, this makes it really hard to know when to sell a stock because we innately have loss aversion. In contrast, we also want to make a good return on our investment, which can cause the little green monster called greed to appear on our shoulders telling us how long to wait to sell a stock. Does greed actually know when to sell a stock? Nope, not at all.
It’s these human emotions paired with not knowing the future of the market that makes knowing when to sell stocks and when to buy stocks really difficult. Thankfully there are automated investment strategies and long-term investment strategies that can take this responsibility off investors.
Trying To Time The Market Is Not A Viable Strategy
The premise for making a return on buying and selling stocks is that you buy low and sell high. This requires that you try and ‘time the market’, meaning you make an educated guess and pick stocks that you think have a high chance of going up in price so you can later sell them for a return.
The only problem is that stock prices are impacted by numerous factors including supply and demand. There is no way to truly predict this, making it an investment strategy with a higher risk. Financial experts agree that time in the market, not timing the market is ideal for investing. That said, buying and selling some stocks on the side of your regular investments could be fun and interesting. Just be sure you have the money and aren’t afraid to lose some money.
Investing In Stocks Is For The Long Term, Not Short Term For Most Investors
The market moves up and down a lot. This is called volatility and can be the cause for major stress when you want to buy or sell stocks in a short amount of time. However, consistently investing over many years in diversified investments allows you to come back from the harsh downturns of the market and take advantage of a historically healthy return.
So whether you bought individual stocks or you have an index fund, don’t rush into selling your stocks. Instead, review your long-term strategy and discuss rebalancing your portfolio with a financial planner if you’re concerned about how your investments are doing.
When To Sell Stocks
You No Longer Support A Company You’ve Invested In
When you originally purchased stock in a company, you probably did so because you determined the company had potential. However, not all companies are successful which may be a reason you choose to sell your stocks. Indicators a company is not doing well may include:
- Revenue numbers dropping considerably over multiple quarters (a sign of reduced demand).
- Declining profit margins within the year.
- A significant reduction in their company headcount (this can cause stocks to rise in price temporarily and then plunge).
- Of course, a company you invested in may make controversial business decisions you don’t agree with or have legal troubles, which can also be a legitimate reason to sell your stocks.
The Company Is Being Acquired
If a company is being acquired, this could be a reason to cash out and sell your stocks.
Commonly, when a company is acquired it means another company comes in and purchases the shares of the other company. They can choose to purchase all or most of the shares, or come in with a cash and shares offer; whatever is needed to gain control over the company.
When this is the case, you need to decide whether or not you want to be an investor with the new company that is acquiring the company you originally invested with. If you’re ok with it, then there is no need to sell your stocks. If you aren’t, then you may consider selling your stocks. As you make this decision you will need to do your own research on the new company and the acquisition deal.
A company can also be acquired by another company in an all-cash offer and not through the purchasing of shares. When this occurs it can be risky to keep your stocks with the company because these deals can quickly fall apart. This often causes the stocks to drop in value. In this case, it can be a good idea to sell your stocks.
You Need to Rebalance Your Portfolio
As you progress on your journey towards retirement you will want to rebalance your portfolio. This simply means you adjust what you’re investing in based on your current risk capacity. Typically as you get closer to retirement you invest in fewer stocks as they are riskier and you increase the number of bonds you’re invested in.
The general rule of thumb is to subtract 100-110 from your age and the result is the percentage of your portfolio that should be invested in stocks. For example, a 45-year-old should have about 65% invested in stocks according to this formula.
You may also need to rebalance your portfolio if you have too many eggs in one basket, meaning you have a significant amount invested with one company. This can cause your portfolio to be out of balance. This also carries risk, because if that company takes a turn for the worse so do your investments. In this case, it may be a good idea to sell your stocks and invest in a more diversified portfolio.
The Valuation Is High
Valuation is used to determine the current or projected worth of a company. While many factors are considered for a full valuation, one you can use to analyze your stocks is the Profit-to-Earning ratio (P/E ratio). This value ratio is used to measure a company’s share price compared to the per-share earnings. When using this ratio is important to compare apples-apples, meaning previous data within the same company or very similar competitors.
For example, if the profit-to-earnings ratio takes a massive leap compared to the last 10 years within the company this can be a sign of a short-term boom. It indicates that the value of the shares is much higher than the actual company earnings. While nothing is for certain, it can often be a sign that there is potential future trouble for those company shares and a reason to sell your stocks.
When Not To Sell Your Stock?
If you’re investing for the long term, you probably aren’t’ going to be selling stocks left and right. Even if you’ve invested in individual stocks in a separate brokerage, you’ll want to really do your research before you decide to sell your stock. Below are two major reasons why you may decide not to sell your stocks.
Taxes (Unless Advised)
When you purchase stock outside of a retirement account, you will need to pay capital gains tax. This means if you purchased stocks within a brokerage account, not within a 401(k), IRA, etc, and you would need to pay a tax based on your tax bracket.
If you sell the assets (in this case stocks) within a year of buying them, you would only need to pay a short-term capital gains tax, which is less than the long-term capital gains tax that needs to be paid if you keep the assets over a year.
Individuals who choose to sell stocks at a loss and replace that investment with a similar one are taking part in the tax-loss harvesting strategy. The idea is that you can deduct the loss from your investment to offset the capital gains you pay.
Here’s the catch: the decision to sell your stocks based on taxes alone isn’t considered a wise decision. The saying is “don’t let the tax tail wag the dog”. Despite this sounding like a line out of an old fable, the principle is important. Generally, experts agree that tax strategy shouldn’t take the place of a solid investment strategy, which is what that archaic phrase is getting at. Meaning, don’t sell your stocks at a loss just to avoid paying capital gains taxes unless your tax advisor has given you a reason to do so or you decided to sell the stock anyway for another reason entirely.
Due To A Price Jump
It can be so tempting to see your stock when the price jumps, but you don’t ever want to make investment decisions based on the whims of the up and down market. Even if your stock jumps 20% rapidly (within 3 weeks), there is a general rule called the ‘8 Week Hold’ that suggests you hold onto your stocks when they jump like this for at least 8 weeks. The reason being that it could be a stock that does really well over the long term.
There is no ‘secret’ to finding the next Google or Netflix when it comes to buying stocks. Don’t let the chatter or gossip get to you. Otherwise, you’ll be selling stocks based on theories and not research or analysis which is never a good idea. Price changes will be frequent, so this should not be a reason to sell your stock, period.
How to Sell A Stock: The Exact Steps to Take
1. Open a brokerage account if you don’t have one already. You can even sample their trading platforms.
2. Deposit your stocks and fund the account. (If you’re already with a brokerage then skip the first two steps.)
3. Within your trading account, set your sell price of the stock or stocks and the type of order. Every platform will have a slightly different trading interface, so be sure to research for your particular brokerage.
4. Alternatively, instead of placing the trade online you can contact your broker and have them complete the sale.
Remember, anytime you buy or sell stocks there may be fees, and it’s important you look at those for your brokerage accounts.
Alternatives To Selling Your Stock
Instead of dealing with the headache of buying and selling your stocks, you can opt for an easier and automated investing strategy. There are many online brokerages that now offer Robo Advisor services to make investing in stocks passive instead of active. The platforms normally have an initial evaluation phase where they ask you about your age, potential retirement date, risk tolerance etc. Based on your answers, the platform will suggest investments for you and work to manage them so you don’t have to.
As an ending note, if you have not yet taken advantage of your 401(k) or an IRA, this should come before you invest in stocks with a brokerage. These accounts carry tax benefits, and you can choose to invest in things like an Index fund which automatically diversifies your investment and tracks an entire index (like the S&P 500). This means you won’t need to be buying and selling stocks, just consistently investing over the long term to build your nest egg.
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