When to sell a stock: 7 tips for getting out at the right time
Know when to ditch your position.
So, you bought some stock.
Hopefully, it’s gone up in value since you bought it (if so — yay!). Or, maybe you’ve incurred some losses since investing — if that’s the case, we’re sorry.
But, whether your stock has gone up or down, it’s important to know when it’s time to sell. Knowing when to sell a stock is every bit as important — maybe more so — than when and what to buy.
So, we’ve assembled this list of tips to help you know when you should cut bait or trim back your position, and what to do once you’ve decided it’s time to get out.
7 tips for when to sell
People have different reasons for selling an investment. They can vary based on the investment or personal circumstances. Sometimes, the outlook for a stock isn’t as good as when you bought it. Other times, you just need the money. But there are some common triggers for investors to use in deciding when to sell.
Here are 7 times you can take to the bank — it’s time to sell:
1. The company’s outlook is worsening
Every company goes through cycles. Sometimes, they’re in a growth mode — adding employees and building revenue streams — and sometimes they plateau. Occasionally, then even suffer setbacks that require them to consolidate their business lines or lay off employees.
If the future for a stock doesn’t look as bright as it did when you bought it, that’s an easy call — it’s time to sell. You don’t have to find another investment right away, but you shouldn’t stick around if the company’s outlook is questionable.
2. You have liquidity needs
Sometimes, a company’s circumstances don’t change, but yours do.
If you’ve come into financial hardship and need cash, there may be no way around it — you may need to sell. That way, you can access the proceeds from the sale for paying bills or other purposes.
3. Changing economics
Most investments don’t perform will in all economic cycles. Companies in industries that perform well when interest rates are falling, for example, don’t always do well when interest rates are rising.
If you own stock in a company that’s highly cyclical, you may want to consider selling when economics are changing, before the stock price is impacted.
4. Tax loss harvesting
Tax loss harvesting is when an investor sells a stock that has gone down in value in order to offset the loss against capital gains from other investments that have gone up in value.
Tax loss harvesting is a valuable strategy for reducing tax liability. If you haven’t encountered it before, be sure to look it up. It’s extremely helpful, but only in non-qualified investment accounts. (IRAs, and 401(k) accounts are sheltered from capital gain taxes, anyway, and there’s no capital loss booked when you sell investments at a loss.)
5. Taking gains off the table
More often (hopefully) than tax loss harvesting, you may want to sell an investment when you’ve actually MADE some money and want to protect your gains.
The psychology here is similar to sitting down at a blackjack table in a casino. If you’ve played a few hands and made some money, you might want to take some of your chips off the table and put them in your pocket. That way, if you lose everything that’s still on the table, you’ll still have some gains that you’ve protected, and you can still cash out without walking away empty-handed.
Using this strategy, you can sell part of your position in a stock and keep the cash; or you can double down by reinvesting your gains in something else.
6. There’s bad company decision-making
If you own stock in a company and become aware that directors and managers at the company are making poor decisions, these decisions can significantly impact the future prospects of your company and you should sell your shares immediately.
Some examples of bad decision-making at the company level include:
- Buying a bad target company or entering a bad merger
- Spinning off a profitable division
- Good managers are leaving
Or, if the company is being sold — especially at a bad price — it may be time to sell. When companies are sold, there are often shake-ups. Some employees may get laid off. Others (often the wrong ones) may get promoted. Cultures change, and sometimes the company’s most valuable talent may decide to take their skills elsewhere.
7. Better opportunities exist elsewhere
One last tip for when it’s absolutely time to sell an investment is when you think you can find a stock that will do better. People invest in stocks to make money, and if you think there are other stocks that will perform better than the stock you already own, it’s time to sell and try to take advantage of those other opportunities.
What to do when it’s time to sell
Once you decide to sell a stock — whether for one of the reasons listed above or something else — you actually have to do something. There are a number of ways that investors can reduce their exposure to a stock. Investors can do any one of these things, or some combination of them, to reduce their risk if the stock they currently own goes down in the future.
- Liquidate your position - This is when you sell your shares in a company. It’s pretty simple and straightforward, and can be done pretty quickly. All you need to do is log into your trading account and enter a sell order.
- Sell your gains - Investors who have made money in a stock can sell any excess balance over the amount they originally invested. They can reinvest these gains in another stock or just hold onto the cash.
- Sell the principal - Instead of selling their gains, investors can also sell the amount they originally invested. That way, continuing the casino analogy, they’re playing with the house’s money.
- Buy put options - Put options give investors the right to sell a certain number of shares of stock at a preset price. These options are used to protect investors who think that a stock price may go down in the future. Using put options, they can protect themselves from the downside without actually selling their shares. That way, if they’re wrong and the stock price goes up, they can still participate in the upside.
Once you sell your shares in a company, you still have to figure out what to do next. Of course, you can also try to find another position — another stock to buy. That’s a great option if you find there’s something you like better.
And sometimes, the thing to do is just to hold the cash. That way, you can wait for an opportunity to come along, while enjoying less volatility in the meantime, sitting safely on the sidelines.
The opinions expressed in this article are for general information purposes only and are not intended to provide specific advice or recommendations about any investment product or security. This information is provided strictly as a means of education regarding the financial industry.