When to Sell a Stock

22 December, 2013

When to sell stocks

If you were in the stock market in 2008, you probably felt like you were on a roller coaster at Disney World that was never going to stop.  Any stock investor has wrestled with the question, “when do I sell this stock?” at some stage of their investing career.  This two part article addresses that question, either if your stock is up or if it is down.

If your stock is up:

If a stock is up, the good thing is you are in the black and making money, congratulations!  You should always feel good about that.  However, we do not always feel good; especially if 2 days after we sold the stock it continued to rise another $3 dollars per share! 

If you invest in stocks, the biggest thing to remember is you cannot time the market.  If you could buy at the lowest point and sell at the highest point during a predetermined time period, you would be a millionaire.  However, you can certainly watch the trends of a stock, and buy and sell within those trends.  The best thing to do when you buy a stock is have a realistic price in mind that you want to sell it.  If a stock hits that point, you have to be disciplined enough to sell it.  Setting that point depends on your goals:

1.  What is your investing strategy?  Are you a day trader or a frequent trader (every few days) who hopes to generate a positive cash flow?

2.  Are you a long term investor, who is hoping this stock will rise faster than the rest of the market over a longer period of time?

3. How long have you held this stock?  Let’s say you have held this stock about 11 months and have a 30% gain in it.  If you sell before one year you will have to pay short term capital gains.  If you pass 12 months of holding it, you fall into long term capital gains – usually saving 10% to 15% on the taxes.

At the end of the day, if your stock is up, you have made money.  Remember that fact and feel good about it.  Tomorrow you can always find another stock to buy, just make sure you know what you are buying (do research!) and have a strategy in place.

If your stock is down:

This can sometimes be a hard pill to swallow because technically you have not lost money until you actually sell the stock.  There is always a chance your stock can recover, but how long do you wait? 

One of the important rules when buying a stock, is to set a price to sell it.  This includes a price if the stock goes up or down.  It is hard to sell your stock when it has declined, but sometimes it is necessary.  You must be disciplined to follow your strategy.  If you set a sell price that is 15% below your purchase price, and your stock hits that price you have to sell it!  There are several factors to consider when deciding to sell a stock:

1.  What is the strength of the company?  If this stock purchase was in a company with heavy debt and its long term prospects are not good then that should certainly factor into your decision.

2.  What time of year is it?  If you are in the later months of the year, you might consider selling stocks that are down to take the loss on your taxes.  If you have questions, you should consult your tax preparer.

3.  How much do you have invested in this stock?  If you have bought 1000 shares of a $1 dollar stock, it is probably okay to be more aggressive on your sell price because you do not have a lot invested.  If it falls to $.25 you have lost $750 but that is probably not going to break you.  However, if you invested $10,000 in this same stock, you may be sweating a little more.

4.  Do you need the cash?  If you can wait a little longer for a possible recovery, then do it.  Only you can make that decision.  However, be realistic about the possibility of recovery.  If you are still holding Yahoo from when it was $400/sh during the .COM boom days, it is probably time to sell it and take the loss on your taxes.

Remember, stock market investing is risky and not for those with a weak stomach.  However, if you are willing to do research and implement an investment strategy, you can do okay investing in stocks.  Good luck!

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