How to Know When to Sell a Stock: 5 Reasons to Consider Selling — Money Saved Is Money Earned
For many investors, buying and researching what stocks to buy can be interesting. The desire to identify a winning stock pick taps into our human nature. We like to talk about what investments to integrate into our portfolios in the hope of turning a profit.
On the other hand, human nature can sometimes make it difficult for us to let go of shares, whether a stock has generated profits or delivered losses. It can feel like a tricky decision to make.
Here are some ideas to keep in mind if you are wondering when to sell a stock for profit or sell one at a loss.
Selling a Stock 101
Here are some steps to selling a stock:
1. Whether by phone or via an online brokerage account platform, let your broker know which stock holdings you’d like to sell.
2. Specify which order type you’re interested in. This can determine at what price level your stock is sold.
3. Fill out any other information your broker requires in order to initiate the sale. For instance, some accounts may have a “time in force” option, or when the order expires. Keep in mind, the trade date is different from the settlement date. It usually takes two days for a trade to settle.
4. Click “Sell” or “Submit Order.”
Recommended: What is Trade vs. Settlement Date?
Market Sell Order: This order type involves selling a stock immediately. The order will be executed without the investor specifying any price level to sell at. It’s important for investors to know however that because share prices are constantly shifting, they might not get the exact price they see on their stock-data feed.
Limit Sell Order: These limit orders involve selling a stock at a specific price.
Stop-Loss Sell Order: A stop-loss order is a level at which an automatic sell order kicks in. In other words, an investor specifies a price at which the broker should start selling, should the stock hit that level. This can also be referred to as a “Sell Stop Order.”
Stop-Limit Sell Order: An order that’s executed if your stock drops to a certain price, but only if the shares can be sold at or above the limit price specified.
There are desktop platforms and mobile phone apps that offer brokerage services. These are likely the most common ways individual or retail investors are selling stocks these days. However, another option is through a financial advisor. This is a person who has been entrusted to handle certain financial responsibilities and you can send them a stock sale order to execute.
Recommended: Are Financial Advisors Worth It?
5 Reasons You Might Sell a Stock
There are several reasons you might want to consider selling a stock. Here are a couple. Please note that none of these amount to a recommendation. They are ways to think about the decision.
When you bought the stock, you presumably did so because you believed that the company was promising and/or that the price was reasonable.
If you start to believe that the underlying fundamentals of the business are in decline, it might be time to sell the stock and reinvest those funds in a company with a better outlook.
There are many reasons you may lose faith in a company’s underlying fundamentals. For example, the company may have declining profit margins or decreasing revenue, increased competition, new leadership taking the company in a different direction, or legal problems.
Part of the trick here is differentiating what might be a short-term blip in the stock price due to a bad quarter or even a bad year and what feels like it could be the start of a more sustained change within the business.
Every decision you make comes at the cost of some other decision you can’t make. When you spend your money on one thing, the tradeoff is that you cannot spend that money on something else.
Same goes for investing-for each stock you buy, you are doing so at the cost of not holding some other stock.
No matter the performance of the stock you’re currently holding, it might be worth evaluating to see if there could be a more profitable way to deploy those same dollars. Exchange-traded funds (ETFs) that provide easy access to other asset classes-like bonds or commodities-as well as newer markets like different types of cryptocurrencies have also created competition to simply holding plain-vanilla company stocks.
This is easier said than done because we are emotionally invested in the stocks that we’ve already purchased. It may be a good idea to try and be as objective as possible during the evaluation and re-evaluation processes.
Oftentimes, stocks are looked at in terms of their price-to-earnings ratios. The market price per share is on the top of the equation, and on the bottom of the equation is the earnings per share. This ratio allows investors to make an apples-to-apples comparison of the relative earnings at different companies.
The higher the number, the higher the price as compared to the earnings of that company. A P/E ratio alone might not tell you whether a stock is going to do well or poorly in the future.
But when paired with other data, such as historical ratios for that same stock, or the earnings multiples of their competitors or a benchmark market, like the S&P 500 Index, it may be an indicator that the stock is currently overpriced and that it may be time to sell the stock.
A P/E ratio could increase due to one of two reasons. First, because the price has increased without a corresponding increase in the expected earnings for that company.
And two, because the earnings expectations have been lowered without a corresponding decrease in the price of the stock. Either of these scenarios tells us that there could be trouble for the stock on the horizon, though nothing’s a sure bet.
Though not an analytical reason to sell, it is possible that you may need to sell a stock for personal reasons, such as needing the money for living expenses or in the home-buying process. If this is the case, you may want to consider a number of factors in choosing which stock to sell.
You may make the decision based purely off of which stocks you feel have the worst forward-looking prospect for growth while keeping those that you feel have a better outlook. Or, you may make the decision based on tax reasons.
A tax strategy shouldn’t outweigh making decisions based on investment principles. Still, some people may take the rules of taxation into account when making decisions about which stocks to keep and which stocks to sell.
When purchased outside of a retirement account, gains on the sale of an investment like stock are subject to capital gains tax.
It may be possible to offset some capital gains with capital losses, which are acquired by selling stocks at a loss. If you’re considering this strategy, you may want to consult a tax professional. One strategy that some people use is automated tax-loss harvesting, or purposely selling some investments at a loss in order to offset the tax consequences of another profit-generating investment.
When Not to Sell a Stock
Before discussing valid reasons you may want to sell a stock, let’s talk about what might not be a good reason to sell a stock: Making a knee-jerk reaction to the recent performance of that stock.
This can be classified as attempting to time the market. Even the experts cannot always buy at the bottom and sell at the top. Know that there is no perfect equation and that it is not science.
It can be tempting to sell a stock based on a big dip or bump in price, but the recent price movement alone might not give a complete picture of the current value of a stock.
It may help to remember that a stock is something that trades in an open marketplace and that prices shift due to the buying and selling of these stocks.
This is especially the case in the short term. Therefore, price changes may have as much to do with investor sentiment or outside forces (such as geopolitical or economic events or announcements) as they do with the health of the underlying company.
If making the decision about when to sell a stock is causing you to lose sleep, it may be time to consult the help of a professional or seek out investment strategies that don’t require making such a decision.
You may want to differentiate between index funds and managed funds. Index funds mimic some particular part of the overall stock market and don’t involve an active manager. For example, an S&P 500 mutual fund (or ETF) holds all 500 companies held in the S&P 500 index. With the purchase of just this one fund, you are actually buying into the 500 stocks that are currently measured by the S&P 500 index.
With SoFi Invest®’s Automated Investing, a robo-advisor service, you can get an investment portfolio of ETFs built for you using your goals, risk tolerance, and investing time horizon as a guide. An alternative is SoFi’s Active Investing platform, which allows you to actively buy, sell, and trade stocks, ETFs and fractional shares.
This article originally appeared on SoFi and has been republished with permission.
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