When can we sell stocks

Intrinsic Reasons to Sell

When the initial buying decision was a mistake: Most experienced investors may have encountered this situation at some point. You’ve watched this stock—or more likely, a meme stock—make phenomenal gains on a daily basis, so you finally decide to suspend your disbelief and recklessly put in a sizable buy order for the stock. But as soon as you do so, you realize that you’ve probably made a mistake. The best course of action in this case is to sell the stock, even if it means taking a small loss on the trade. And to avoid making the same mistake in the future, resist the temptation to chase hot stocks that are running on fumes, as they may burn you financially.

When the price rises dramatically: Selling a stock merely because it has risen dramatically in price isn’t always the best course of action. In some cases, the price gains may be justified by the company’s underlying fundamentals (for example, its sales and/or earnings may be growing faster than investors’ expectations). But in other cases, the price may have posted exponential gains purely on speculation, or due to other reasons such as takeover rumors or a short squeeze. In such cases, the investor would be well-served by doing some research to try and ascertain the reason for the stock gains, and depending on the findings, either sell the full position or sell part of the position and put in a stop order to sell the balance if it trades below a certain price. The more that a stock’s short-term gains contribute to your overall portfolio, the more critical the sell decision. For example, if you bought 1,000 shares of a biotech stock at $5 per share when your total portfolio was worth $25,000, that stock constituted 20% of your portfolio. If, after three months, that biotech stock quadrupled on promising trial results while the rest of your portfolio is unchanged, it would now account for 50% of your portfolio. In this situation, it might be prudent to sell some of your shares and book part of the profits, because of the negative impact on your portfolio if the stock retraced most of its advance.

When a stock reaches your price target: Have you ever owned a stock that has been down in the dumps for years, but suddenly has a new lease on life and is now trading at your original entry price? If you promised yourself that you would sell the stock if it ever came back to your buy price, dump it without hesitation (you shouldn’t have been holding on to that loser for so long in the first place, but that’s a subject for another time). Similarly, if a stock reaches a level that it traded at all too briefly in the past, and you always thought that you would sell if it reached that price again, or would consider selling part of your position rather than regret another missed opportunity, then why not sell all of it?… Because of the next point…

When a stock trades at a technical inflection point: When a stock trades near—and then breaks below—a multiyear low, it often portends additional losses ahead. In this case, it may make sense to sell the stock as soon as the technical level is breached on the downside. Likewise, if a stock breaks through a key resistance level on the upside, it may signal more gains and a higher trading range for the stock, which means it might be advisable to sell part of the position rather than all of it. Technical analysts also watch stock price charts closely to identify other signals such as moving average crossovers.

When the fundamentals deteriorate: A stock’s fundamentals may deteriorate for any number of reasons: slowing earnings and/or revenue growth, increased competition, higher costs and lower margins, or simply valuation. The first such signal of deteriorating fundamentals may come from a company’s quarterly earnings report, or sometimes from “guidance” ahead of an earnings report. Market reaction to negative news from a company, such as an earnings miss or lowered forward guidance, tends to be swift and unequivocal, with the stock likely to plunge by double digits. In such cases, the investor needs to determine whether the deterioration in the stock’s fundamentals is temporary or permanent. Since this is no easy task, it might be preferable to sell and exit the position first, then evaluate if it should be bought back later.

When a rival company issues bad news: Often, the problems affecting a specific sector may be highlighted when a bellwether company in that sector reports an earnings miss. If you own stock of a company in that sector, consider selling it unless you are quite confident that your stock will not be affected by the sector’s woes.

When the market looks wobbly: This is no easy task, and is certainly not a suggestion to indulge in market timing, but there are times when the broad market looks overextended; at such times, it makes sense to cull the weaker names in your portfolio. In a financial earthquake, stocks of companies that have a heavy debt burden or a weak financial position might be the first to collapse.

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