Making money on stocks involves two decisions: buying at the right time and selling at the right time. If investors sell too early and the stock price increases, they risk leaving gains on the table. If they sell too late and the stock plunges, investors may miss an opportunity.
Investors use strategies to identify when and why it is time to sell a stock. In some cases, the decision to sell a stock may be precipitated by a combination of personal reasons like losing a job, retiring, or buying a home.
Key Takeaways
- Selling a stock is often more difficult than deciding to buy it.
- A combination of intrinsic and extrinsic factors can trigger a sale.
- Emotion and human psychology sometimes cloud decision-making when investing in the stock market.
1. Financial Mistake
Investors who watch a stock make daily gains may place a sizable buy order for the stock without doing their homework or considering personal finances. As soon as this investor thinks it is a mistake, the best action is to sell the stock, even if it means taking a loss on the trade. Resist the temptation to chase hot stocks without first considering the amount of the investment.
2. Quick Gains
Investors commonly sell to reap quick gains. However, selling a stock merely because it has risen dramatically in price isn’t always the best course of action. The price gains may be justified by the company’s underlying fundamentals or purely on speculation due to 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 specified price.
3. Price Target
Traders commonly watch a stock plummet and regain new life trading at the investor's original entry price. It's time to dump it without hesitation. Those who trade stocks commonly have many price targets, such as the entry point or a level where the stock traded briefly in the past, and they choose to sell instead of regretting another missed opportunity.
4. Technical Analysis and Fundamentals
Technical analysts watch stock price charts closely to identify signals such as moving average crossovers. When a stock trades near, and then breaks below, a multiyear low, it often portends additional losses ahead. It may make sense to sell the stock as soon as the technical level is breached on the downside. 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's advisable to sell part of the position rather than all of it.
A stock’s fundamentals may deteriorate due to slowing earnings, low revenue growth, increased competition, higher costs, lower margins, or valuation. The first signal of deteriorating fundamentals may come from a company’s quarterly earnings report.
5. Company News and Market News
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. In such cases, the investor determines whether the deterioration in the stock’s fundamentals is temporary or permanent. Commonly, problems affecting a specific sector may be highlighted when a bellwether company in that sector reports an earnings miss. If investors own stock in a company in that sector, they often consider selling it.
There are also times when the broad market looks overextended; at such times, it makes sense to cull the weaker names in a 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.
6. Cashing Out or Change in Lifestyle
An investor will often rebalance a portfolio by selling a stock that has significant gains and outweighs the rest of the portfolio. An investor might wish to sell a stock to book a loss for tax purposes or cash out to deploy in a competing investment, such as real estate.
Lifestyle changes present good reasons for selling a stock. Younger investors might sell to make a down payment on a house or buy a car. Investors nearing retirement might sell stocks to wind down the equity part of their portfolios and reduce their risk exposure. Parents may also sell stocks in tax-advantaged plans earmarked for specific purposes, such as their children’s education.
If the Price of a Stock Plunges, Do Investors Sell It or Buy More to Average Down?
This depends on several factors, such as the kind of stock, risk tolerance, investment objectives, and amount of investment capital. If the stock is a speculative one and plunging because of a permanent change in its outlook, then the investor may sell it. But if it is a blue chip that has suffered a temporary setback, then averaging down is a strategy an investor may consider.
Can Traders Sell a Stock on the Same Day They Bought It?
Those who commonly do this are considered day traders. However, day trading can result in substantial losses and is best left to experienced, well-capitalized traders.
How Long Does It Take to Receive the Proceeds of a Stock Sale?
For most stocks, the standard period to receive the proceeds of a stock sale is two days. This is known as the T+2 settlement period.
The Bottom Line
Investing in stock involves timing to buy and timing to sell. Investors use strategies to determine when to sell a stock based on market data, technical analysis, or personal financial reasons.
