Most traders and investors, novices and experts alike, grapple with the dilemma of deciding the right time to buy and sell stocks. Sometimes one regrets selling before the stock has peaked – missing out on attractive profits, while at other times, one holds on to a stock for too long in the hope that a failing stock will rise again.
Fortunately, for the intelligent investors, there are many clues to look out for to help decide when to buy a stock and when to sell a stock. The difficulty for investors in deciding when to sell a stock for profit is rooted in many investors’ tendency to let emotions get in the way of smart decisions. The best decision-making strategies are those that rely on data and eliminate human emotions from the process.
So, when is the best time to sell a stock?
When buying seems to be a mistake in the first place
Smart investors, before buying a stock, perform an analysis of the fundamentals of the firm’s operating performance, the management’s confidence in the firm’s growth prospects, and the general business environment. If a regulatory change or a permanent change in the business environment nullifies your initial rationale for buying stock online, it would be prudent to sell the stock.
Careful analysis is the key. It is wise to sell a stock if a firm’s stock price goes down because it fails to meet short-term earnings forecasts (assuming the firm’s business fundamentals remain intact). However, if the firm begins losing market share to competitors, it is an indication of long-term weakness – a sound reason for you to consider selling the stock.
The stock price rises dramatically
If the price of the stock you hold rises dramatically, it is a good time to earn some profits by selling your stock. The price of a stock can rise dramatically for a variety of reasons, including speculation by others. It is a smart strategy to sell the stock for a profit and then move on.
The stock price is unsustainably high
A trusted rule of thumb used by investors to decide when to sell a stock and earn profits is when its valuation is substantially higher than its peers. Most often, analysts use the price-to-earnings ratio (P/E ratio) to assess the true value of a firm’s stock for comparing it to its peers and against its own performance history. The P/E ratio is an indicator that a stock is over, under, or fairly priced.
Lower trading volume
If a stock is trading at an unusually lower volume than before, it could be a sign of trouble. Stock liquidity is an indicator of how quickly a stock can be bought or sold. An illiquid stock is a sign of underlying trouble in the firm and may be considered for selling.
To meet financial needs
It is perfectly valid to liquidate your assets held as stock to meet your personal financial needs. It could be for starting a new business or buying a house. This decision to sell shares is based on the individual’s financial requirements rather than on an analysis of the fundamentals of the stock.
If tracking changes in the market to sell your stock for an attractive return seems like a difficult task, you could consider reaching out to a financial advisor who sends timely alerts so that you know when to sell or swap your investments, thus becoming apt at the art of selling stocks.