Hardest Part Of Investing Is Knowing When To Sell

by Hank Coleman

When to sell your shares of stockProbably one of the most difficult undertakings in the art of investing is knowing when to sell a stock. After all, you stand the chance of missing out on a large return on your investment if you sell too soon or too late. There are also other attributes to consider as well. Selling shares will, of course, incur transaction fees or commissions. Selling will also require you to pay taxes on any returns on your money. Selling shares in a company will also require you to find a better investment for your cash.

Your Criteria For Long Term Financial Growth

A lot of people who buy stock buy shares with the goal of long term investment in mind. So, in theory, long term investors have a long time horizon in order to recoup any potential losses that they may have suffered in bear markets like the most recent one. It is easy not to get wrapped up around the axle when you do not need your money for several years down the road. Nevertheless, when the market is volatile, people tend to overreact and sell at the wrong time. Dollar cost averaging can help navigate the up and downs of the market swings.

Set Rules For Selling Shares Of Stock

The best thing to do is to establish a plan as to when to sell your shares of stock before the need arises. For instance, set a rule that if a stock you will share your stock if it falls 10% from the amount you paid for the shares. While no one wants to lose 10% of their investments, a 10% loss would be better than continuing to losing more as the price continues to drop.

Protecting Yourself Against Substantial Losses By Placing Stop Orders

Also, to further safeguard your investments, you should consider placing limit orders on your stocks for selling as well as buying. In other words, place a stop order on stocks with your broker when the share prices starts to decline beyond your set criteria. Therefore, if you own a stock that currently costs $50 per share, you can place a stop order on it if the share price falls to $45, for example, which would be a 10% decline. Or, if you currently cannot afford the share price of a stock you want to buy, you can place a limit order to attain the stock when it falls to a price that you can manage.

Know The Reason You Bought The Stock In The First Place

Investors buy shares of stock for a specific reason. He or she believes that a stock’s price will rise because of a host of factors such as a new product coming out or strong management with an excellent game plan. However, sometimes a philosophy does not pan out. Sometimes the rationale behind what was supposed to be some winning stocks can change. When your fundamental reason for holding a stock changes, then that is the perfect time to sell a stock.

By doing your research and keeping a watchful eye on your share holdings, you can keep losses to a minimum and know when to sell your shares. Knowing why you bought the shares of the company in the first place and what the companies is doing now can help you find out when to sell your shares of a company.

(photo credit: Shutterstock)

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{ 4 comments… read them below or add one }

ctreit October 25, 2010 at 4:04 pm

I find it easier to sell shares when they are losing money, but it has happened that I was careless and I did not follow my own rules of selling when a stock declines by x %. Generally I find it harder to know when to sell if a stock move my way, because it is so difficult to determine when the market has assigned its “fair” value to a stock.

Jenna October 25, 2010 at 6:55 pm

Would your rule for knowing when to sell also apply to those stocks which gain 10%?

Hank Coleman October 26, 2010 at 7:38 pm

Jenna,

Thanks for the question. Absolutely. Having a sell rule for a gain is almost just as important as having a rule for a loss. The problem here is where do you set the threshold. I’m not sure that 10% if enough of a gain. I like to set my upside sell criteria high enough to “beat” the S&P 500 index annual return average which is historically in the 10 to 12% range. So, I might set my own sell criteria to a 15% gain or so. It depends also on your fundamental analysis. Did you buy the stock at $10 per share knowing that it should be valued closer to $20? Then, you might want to wait until you get up to that level. If you have a long time horizon, you can afford to wait a while for it to hit your predetermined mark.

Karl October 28, 2010 at 5:37 am

I understand the idea of stop orders, and their utility, but I am curious as to how such an order would work in the context of a wild swing (-10% back to 0% within the span of hours) like the one which occurred earlier this year.

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