6 Reasons to Sell a Stock

How do you decide when it's time to sell a stock? Making money on the stock market involves just two correction decisions: when to buy and when to sell the stock. Sell too early and you risk leaving gains on the table. Sell too late and your profits could have evaporated.

Savvy investors have sound reasons for deciding when to sell a stock. They may include:

• Selling the stock because they realize it was a mistake to buy it;
• Selling stock to lock in a gain;
• Selling the stock because it has failed to perform as expected;
• Selling the stock because it has met your target price;
• Selling the stock in response to bad news;
• Selling stock to finance an improvement in lifestyle.
  

1. Get Rid of Your Mistakes

Chasing hot stocks is one of the most common mistakes in investing.

Investors have been known to buy stock because they've watched the shares rise steadily for weeks or months and want to jump in on the action. The problem is, they may be jumping in just as other investors are bailing out.

If you do this, you'll soon realize your mistake. Your best move is to dump the stock, even if it means taking a loss on the trade.

2. Don't Hesitate to Lock in Gains

If you own a stock that is performing well, do some research to determine why.

The gains may be justified by the company’s underlying fundamentals and real performance. Or, they could be a knee-jerk response to a takeover rumor or a short squeeze.

If there's no good reason for the stock to be trading higher, consider selling all or some of your shares. You can put in a stop order to sell the rest of the shares if it trades below a specified price.

3. Sell Your Failures ASAP

It's not uncommon for a stock to drop steeply but then climb slowly back. If you're hanging onto a loser and it gets close to your original entry price, don't wait and hope. Sell it now.

You're better off reinvesting the money in a more favorable opportunity.

4. Set a Target Price and Stick to It

Professional stock traders set upside and downside targets based on information, and they buy and sell stocks based on that information.

Technical analysts watch the price and volume trends of individual stocks to identify patterns indicating that a stock is likely to move higher or lower in the near term. They buy or sell shares based on these indications.

Fundamental analysts examine a company's financial reports and its competitive environment to identify stocks that are undervalued (or overvalued) by the markets. They buy those stocks and then sell them when they reach their fair value.

These are very different approaches but the result is the same: They have set a fair price for buying a stock and a fair price for selling it, and they stick to it.

5. Be Ready to React to Bad News

Market reaction to negative news from a company, such as an earnings miss or lowered forward guidance, tends to be swift and unequivocal, not only for that stock but for the entire sector.

The investor must decide whether the deterioration is temporary or long-term.

At times, bad news can hit an entire sector or, for that matter, the whole economy. The first victims will be the stocks of companies that have a heavy debt burden or a weak financial position. Be ready to move your money.

6. Cash In to Improve Your Life

There's only one good reason, after all, for spending all this time and effort investing in the stock market. Stock investors want to make money to make better lives for themselves and their families.

Younger investors might sell to make a down payment on a house or buy a car. Parents may sell to fund a child's education. Older Investors might sell stocks to invest in something safer in preparation for retirement.

These are all good reasons for selling stock.

The Bottom Line

Knowing when to sell a stock is as important as knowing when to buy it. It's wise to do some research in advance. Set a target price for both buying and selling the stock. And stick to it.