#Tips #Decide #Time #Sell #Stock
When it comes to investing, knowing when to buy a stock can sometimes be easier than knowing when to sell it.
Buy recommendations are prevalent and stem from a wide range of sources, including investment newsletters, analysts, stock brokers, and investment managers. However, few of them offer much advice on the best time to sell stocks. Here are five tips for when it’s the right time to sell.
Key takeaways
- Knowing when to sell an investment is just as important as knowing when to buy.
- There are several good reasons to sell your holdings, including securing timely profits or stopping losses before they grow significantly.
- Keeping both fundamental and technical indicators in mind, such as the stock price target, as well as monitoring company actions and news, is key to determining the timing of an exit.
1. Reaches your target price
When initially buying a stock, smart investors set a target price, or at least a range at which they might consider selling the stock. Every stock purchase should also include an analysis of the stock’s value, and the current price should be at a significant discount to this estimated value. For example, selling a stock when its price doubles is a worthwhile goal and implies that the investor believes it is 50% undervalued.
It is difficult for even the most experienced investor to come up with a single target price. Instead, the range is more realistic, as in deciding to sell the position while it is rising in order to lock in the gains.
2. Deterioration of fundamentals
Besides tracking a company’s stock price after setting a target price, monitoring the performance of the underlying business is important. The main reason to sell is if the fundamentals of the business decline. In an ideal world, an investor would recognize a deterioration in sales, profit margins, cash flow, or other key operating fundamentals before the stock price begins to decline. More experienced analysts can read deeply into financial statements, such as providing footnotes that other investors are likely to miss.
Fraud is one of the most serious underlying defects. Investors who discovered financial fraud from companies such as WorldCom, Enron, and Tyco early on were able to save large sums as the stock prices of these companies fell.
3. The best opportunity comes along
Opportunity cost is the potential benefits an investor misses by choosing one alternative over another. Before buying a stock, always compare it to the potential gains that could be obtained by owning a different stock. If this alternative is better, it makes sense to sell the current position and buy the other position.
Quantifying opportunity cost accurately is very difficult, but it could include investing in a competitor if it has an equally compelling growth outlook and is trading at a lower valuation, such as a lower price-to-earnings multiple.
4. After the merger
The average buyout premium, or the price at which the company is acquired, generally ranges from 20 to 40%. If an investor is lucky enough to own a stock that ends up being paid for a significant premium, the best course of action may be to sell it. There may be advantages to continuing to own shares after the completion of a merger, such as a significantly improved competitive position for the combined companies.
However, mergers have a poor record of success. In addition, it may take several months to complete the transaction. Therefore, from an opportunity cost perspective, it may make sense to find an alternative investment opportunity with better upside potential.
5. After bankruptcy
In the vast majority of cases, a bankrupt company becomes worthless to shareholders. However, for tax purposes, it is important to sell or realize a loss so you can offset future capital gains and a small percentage of ordinary income each year.
Selling a stock immediately after bankruptcy often results in a significant loss, but you may still be able to recover some cents on the dollar.
Bottom line
The decision to sell a stock is actually a combination of art and science. There are a number of considerations to make, such as those mentioned above, when determining whether a stock’s gains have come to an end or are likely to continue. One logical strategy is to sell as the stock rises to lock in gains over time and sell against losses to avoid it getting out of control.
#Tips #Decide #Time #Sell #Stock
