You Need To Know When You Want To Sell A Stock Before You Buy It

by Hank Coleman

What is your selling criteria for the stocks you purchase?  Do you even have any?  Even though I am a staunch believer in the buy and hold approach to stock investing, you cannot hold a stock forever.  Even the Oracle of Omaha, Warren Buffet, does not advocate owning a stock forever.  You need to go into a stock position with the end already in mind.  What do you want to get out of your stock purchase?

wall-street-bullBefore You Have Reached Your Financial Goals. One reason to sell your shares in a company are that there has been major changes in the business you are investing in that cause, or will cause, the value of the stock to drop.  You should also set a limit on how much you are prepared to lose from the very first moment you buy a stock. Using a stop-loss order, which instructs your broker at what price to sell the stock if it falls that low, will help you establish a hard cut line.  For example, many people recommend cutting your losses after a stock has declined around 8% to 10% in value.  One of the most common reasons to sell a stock is when you have lost your belief in the investment or company.  Or, say you bought a stock thinking that the company had a great venture about to come down its R&D pipeline, but it did not pan out after all.  This is a reasonable reason to get out of the stock position.

After You Have Reached Your Financial Goals. You have reached your financial goals.  For example, once you’ve reached retirement, you may wish to sell some stocks in your investment portfolio and put your money in safer financial instruments.

My Personal Stock Selling Criteria. I like to make between 12% and 15% annual return on my investments.  The historical stock market return for the S&P 500 has been between 8% and 10%.  So, earning 12% to 15% is very respectable.  Now, I am not saying that I earn those kind of returns consistently.  If that is the case, I am in the wrong profession.  But, I use that as a benchmark and gauge when to sell from that metric.  Jim Cramer is famous for saying in his book, “Real Money: Sane Investing in an Insane World“, “Bulls make money, bears make money, pigs get slaughtered.”  It is more than fine to make money in an up and down markets alike, but people who try and milk every last dime out of stock are destined for a fall.

Like many things in life, quite a bit of time and research goes into selecting which specific stocks to invest your hard earned money in, but it is often hard to know when to pull your money out.  Going in with clear goals and a clear reason for being in the stock in the first place will help you have a well defined exit strategy from day one.

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