When to Sell Stocks? 8 Times It Makes Sense
Buying stocks can seem easy. You place your order and go. When to sell stocks? That can be hard. Different factors can be at play when you are trying to determine when to exit a position.
Human psychology is a funny thing. It often plays tricks on us. And it can make it harder for us to sell stocks at the right time.
Often, the decisions we make are emotional rather than rational. Two of the emotions that tend to dominate investing are fear and greed. Greed can make it much harder for us to determine when to sell a stock.
That’s because when we are greedy, we often hang onto a stock longer than we should to try and make more profits. And when we are fearful, we may sell out of a stock too soon because we are afraid of potential losses. This is especially true when it seems like there is a market correction occurring.
So figuring out the right time to sell a stock is important. Of course, there is a difference between figuring out the right time and market timing.
Timing the markets is generally a losing strategy. It means that you try to buy at the absolute bottom and sell at the absolute top. But nobody knows when the markets or individual stocks will hit those points.
It’s not that timing the markets consistently is hard. It’s that it’s not even really possible. But that doesn’t mean there isn’t a right time to sell. In fact there are quite a few circumstances that can indicate when to sell stocks. So we’ve compiled them for you here:
When to Sell Stocks: A Guide for You
1..Locking in Profits
When a stock climbs higher than the price you purchased it for, you have a profit. Huzzah! We like profits at Investment U.
But here’s the thing. If you do not sell the stock, your profits only count on paper. That’s because if the stock should fall back down below the purchase price, you no longer have a profit. Now you have a loss.
Let’s say you have $10,000 invested in a stock and the price of the stock grows over time from $10 to $20. Congratulations, you just doubled your money and you now have $20,000!
You have several options now. You could hold on to all of your shares of the stock to see if you can earn even more. This may work, but you also risk losing part or all of your profits. And even your initial investment.
A second option you have is to sell all of your shares of the stock. That will lock in your profits. Now you’ve actually earned $10,000 in cold, hard cash. Again, congratulations, that’s swell!
The only problem with option two is that the stock may continue to rise after you have sold it. Because you no longer own any shares, you won’t be able to participate in additional profits.
So there is a third option. A middle way, so to speak. That middle way is selling some of your shares and taking some of your profits.
Let’s say you sell half of your shares. This means you’ve locked in $5,000 of your profits. Nobody can take that away from you. (Except the government through taxation, but that’s a whole separate issue).
But that also means you still have half of your shares invested in case the stocks continue to rise. You will be able to lock in further profits later assuming the stock doesn’t come back down before you sell the rest of your shares.
2. The Stock Is Overvalued
What is the value of a share of stock? On the one hand, you can say that its purchase or sell price is the value of the stock. If a stock is currently trading at $15, then $15 dollars is the value of the share.
But a stock also has an intrinsic value or its “real” value. This is the value that a stock is actually worth based on its present and future cash flows.
A stock that’s selling at $15 may be truly worth $15 based on those present and future cash flows. On the other hand, it may not be.
If the intrinsic value is substantially higher than the purchase price, we say that the stock is undervalued. This is a strong indication that in time the price of the stock is going to increase.
However, if the real value of the stock is lower than the share price, we can say that the stock is overvalued. If that’s the case, then the price is likely to fall.
And that’s a good way to know when to sell stocks. Because if the share price will be falling over the time you plan to be invested, you will want to get rid of the stock.
A whole strategy based around purchasing value stocks – stocks that are undervalued – is called value investing. The strategy of selling stocks that are overvalued is generally just called, well, being smart.
3. You Made a Mistake
Nobody’s perfect. We all make mistakes. And that’s definitely true when it comes to investing.
You should always make sure to do your research before buying a stock. It’s especially important to get to know the business of the company you are going to buy.
Performing fundamental analysis is essential to understanding when to buy a stock. And when to sell a stock. But the truth is, we can be extremely diligent and still make mistakes.
You can make an educated decision about a company. But sometimes it turns out its business wasn’t as solid as you thought.
That’s a mistake. It happens. To most people. But instead of hopin’, wishin’ and prayin’ that something will turn around and correct your mistake, you need to take action yourself. Sell the stock.
Sure, it stings. But it’s just one investment of many that you will be making. Some will do poorly. Some will do very well. Keep your eyes on the forest, not just the trees.
4. Important Business Conditions Have Changed
When you purchase a stock you (should) generally have a good reason for doing so. Maybe the company has been growing its revenues consistently. Or it has a product you love and a business model that makes sense.
Or maybe it’s a hot and trendy company that seems to put forward great earnings quarter after quarter. Regardless, you have some sort of theory that explains why you think the stock will go up in the future rather than down (or, again, you should have such a theory).
For example, let’s say Apple releases an iPhone 12 next year (bet you it will at some point). And all signs point to it being the best iPhone ever. Looking at the history of Apple and where you see it going in the future, you think that Apple is a terrific company and will continue to be so.
So you buy the stock. And at first, things are going great and your shares are increasing over time. Great! But then something else happens.
The iPhone 12 turns out to be a dud. The camera stinks. It breaks easily. Everyone hates it. This will, of course, hurt its share price – all things being equal.
But now you also may have a new perspective on the company. Maybe it’s no longer a leading tech firm. In fact, the more you read about the company and its current management, the more you realize that its glory days are seemingly over.
That doesn’t mean you were wrong or made a mistake. It just means that conditions have changed. For whatever reason, Apple is no longer the innovative tech powerhouse that it once was and can’t deliver like it used to.
The conditions of the business, for whatever reason – a change in management, supply chain changes, bad research and development – have changed. And it means that it’s very likely a good time to sell the stock.
Because you no longer expect its future successes to match the past. And this will likely continue to drive the price of the stock down over time.
5. Company Acquisition
A company acquisition is when one firm buys another. For example, let’s say Google wanted to get into the soda business. This is a stretch, but just go with me here.
So Google acquires Pepsi. And you happen to own many shares of PepsiCo stock. The good news is that this is going to likely increase the shares of Pepsi to the price that Google is acquiring them for.
You’re very happy because you’ve made much profit from the acquisition. And you’ve earned many PepsiCo dividends along the way.
The bad news is, however, you aren’t going to be earning much more profit from PepsiCo stock. That’s because the stock is going away.
At this time there is little benefit you are going to get from holding onto shares of PepsiCo stock. So what you can do instead is simply sell them and invest in something else.
Of course, if you think Google and Pepsi is a match made in heaven, you may want to reinvest some of that money in Google. Or not. That’s up to you.
6. Opportunity Cost (i.e., There’s a Superior Investment)
Every decision in life, by definition, means you have chosen something and not chosen something else. For example, let’s say you are debating between having McDonald’s or Chipotle for lunch.
If you choose McDonald’s you are going to have a Big Mac for lunch. That’s great! Unfortunately, it means you’re giving up a burrito. Now, you may not look at this as a problem, because you’d rather have the Big Mac.
Nevertheless, part of the cost of getting the Big Mac is forsaking the burrito. A sad, lonely burrito that you will not be eating. The burrito not purchased is the opportunity cost of McDonald’s. Chipotle is what you gave up to have the Big Mac you so desperately craved.
Now, the same goes for stocks. Every time you invest in a stock, that means there is either some other investment you didn’t make or some cash you didn’t hold on to. That’s the opportunity cost of buying a stock.
So if you buy some shares of PepsiCo stock, that’s money you could have spent on shares of, say, Coca-Cola, and chose not to. That isn’t necessarily a bad thing. After all, if you expect Pepsi to make much more money over the next decade than Coke, then this is a rational decision.
But let’s say you bought the PepsiCo stock. Over the next three years, it does well. But not as well as you had hoped. On the other hand, Coca-Cola has been flying. And it looks like it’s going to keep doing great for the foreseeable future.
Staying in PepsiCo might be profitable. But selling out of PepsiCo and buying Coca-Cola stock may be even more profitable. And if you think it will be, now would be a good time to sell your PepsiCo stock and jump into Coca-Cola.
7. Rebalancing Your Portfolio
Rebalancing your portfolio is an investing strategy that involves maintaining your desired asset allocation. And sometimes this requires you to sell your stocks.
For example, let’s say you invest with an asset allocation of 80% stocks, 15% bonds and 5% in cash. And over time, your stocks make you a lot of money.
As the value of your stocks increases, it’s going to increase the amount of your portfolio that is allocated to stocks. You may suddenly find yourself with an allocation of, say, 90% stocks, 7% bonds and 3% in cash.
And you may decide that this allocation is too risky for you. How do you fix this problem?
It’s pretty straightforward. By selling some shares of your stocks, buying more bonds and keeping the rest of your proceeds in cash, you can rebalance your portfolio. This will bring you back to the original target allocation of 80-15-5.
Investors often have to do this to maintain their desired risk level. You’ll know when to sell stocks based on measuring your allocation periodically.
8. You Really Need the Money
Well… it’s not the most analytical way to determine when to sell stocks. Nevertheless, sometimes life happens. And you really need the money. I get it. I’ve been there.
Sometimes you need to pay off debt fast. Or maybe you need to make a purchase that you can’t currently afford with the cash you have on hand.
Hopefully you’ve been practicing good personal finance skills. That means doing things like keeping an emergency fund for the unexpected. Keeping your debt low or at least paying it down. And building up as much income as you can.
But as I said, life happens. If you need the cash, sometimes that is the most appropriate time to sell stocks.
No, it’s not ideal, but life isn’t always ideal. Just don’t forget to put that money back into the investment pool as soon as you can to take advantage of as much compounding returns as possible.
When to Sell Stocks? When It Makes Sense
The bottom line is, there are lots of reasons why you may need to sell stocks. We’ve just reviewed many of them.
What’s important when investing is having a plan and sticking to it. Stay rational. Don’t let your emotions lead you to bad decision-making.
If you’re still having trouble deciding when to sell stocks, Investment U has many more resources available for you. And you can get them in your inbox every day of the week by signing up for our free email list in the box below.
About Brian M. Reiser
Brian M. Reiser has a Bachelor of Science degree in Management with a concentration in finance from the School of Management at Binghamton University.
He also holds a B.A. in philosophy from Columbia University and an M.A. in philosophy from the University of South Florida.
His primary interests at Investment U include personal finance, debt, tech stocks and more.