When to Sell Stocks - Best Scenarios When Selling Stocks Can be the Best Decision
Table of Contents
1. An Overview to Stock Market
- What are stocks?
2. Understanding Investing and the Stock Market
- How does the stock market work?
3. When to Sell Stocks
4. Popular Methods for Selling Stock
5. The Concluding Words
1. An Overview to Stock Market
The stock market refers to public markets or a place that exists for issuing, buying, and selling shares of publicly listed companies. The stocks trade on a stock exchange or over-the-counter and stocks represents fractional ownership in a company.
In simple words, a stock market offers a platform to facilitate seamless exchange of shares where buyers and sellers meet for transactions. You can trade stocks through a registered intermediary known as a stockbroker.
What are stocks?
A stock, also known as equity, is a unit of ownership of a corporation or security that represent the ownership of a fraction of a corporation. The owner of the stock is entitled to a proportion of the corporation’s assets and profits as per the share they own. Shares are the units of stock and they are bought and sold predominantly on stock exchanges.
Understanding Investing and the Stock Market
The stock market can feel like an overwhelming topic as many people don’t understand how it works. However, an efficiently functioning stock market is considered critical to economic development as they have an important role to play in the success of commerce. The function of stock markets is an important element as it makes shares and equities investible.
A stock market is a kind of virtual forum where buyers and sellers of an asset meet to trade instruments. As far as the role of the stock market is concerned, it allows companies access to pools of private capital. The collected fund can be used for business growth and development or to invest in new assets. Without access to private funding, businesses would be unable to expand.
How does the stock market work?
If you’re planning to invest in the stock market, you should understand how does it work. Individuals with limited experience may find it difficult to get started as they are either terrified by the horror stories of other investors or got carried away by the promise of huge rewards. However, the reality is that investing in the stock market carries risk but if done properly, it can be rewarding.
The concept behind how the stock market works is not so difficult. It operates much like an auction house as it enables buyers and sellers to trade units of stocks that are called shares. It works through a network of exchanges and companies list shares of their stock on an exchange via a process called an Initial Public Offering or IPO.
The interested investors buy and sell the listed stocks and at the same time, the stock exchange tracks the supply and demand of each listed stock. The supply and demand help determine the price of shares but buyers offer a bid for the amount they’re willing to pay and this amount is usually lower than the amount sellers ask for in exchange.
When to Sell Stocks
Understanding the stock market is essential to making informed decisions and one of the most crucial ones is ‘when to sell stocks’. Experienced investors often track the performance of the stock market by keeping a close eye on a broad market index. This helps them understand the current market position and the closing price on the most recent trading day.
If you’re new to the field and looking for the perfect time to sell stocks, the following tips might help…
- Better Opportunities: Sometimes, you find a better investment opportunity elsewhere and want to sell stocks. There is nothing wrong with a company or its stock, all you want is instant money to invest somewhere more profitable. You can sell the less attractive stocks and get better returns by investing elsewhere.
- Change in Business: Businesses change and this could be in terms of a major acquisition or modifications in the company’s fortune. It could also be a change in management or its style of working. If this happens, you should evaluate the company’s current situation and look if selling stocks is the right thing to do.
- Price Rises Dramatically: The stock you bought may rise dramatically in a short period and it will be the best time to sell stocks. However, it will not be wise to take the fast rise as an affirmation that you know the market. It can be in your best interest to sell the stock but it may not happen again and again.
- Valuations: You should consider selling the stock if the price escalates to a point where it no longer reflects the underlying value of the business. Also, you can consider selling if the stock suffers an unusual decline in its price. If you are investing for the long-term, you can wait until the stock price recovers.
- Diversification: Most investors sell stocks to diversify their investment portfolio as it helps them make sure that their money is diversified across individual stocks and sectors. If you do not have sufficient time to conduct research, you should consider diversification. It will be wise to spread your bets evenly across several stocks.
- Financial Needs: Though it may not seem like a good reason to sell a stock, if any emergency arises you can sell your stocks to meet the needs. Stocks are an asset and there can be times when you may need to cash in on your assets. It could be anything like starting a new venture, paying for college, purchasing a home, etc.
- Dividends are Eliminated or Reduced: It is high time to look into the company’s internal workings when you notice that they start eliminating or cutting dividends. Depending on the monthly or quarterly performance of the companies, you can decide on whether to sell stocks or not as a dividend cut is a serious event.
- Lower Trading Volume: If you notice that the stock is suddenly trading at a lower volume than before, it may be an indicator of stock liquidity. You may want to sell your non-performing stocks by considering the stock liquidity. You can also hold your stock in a hope that they will soon rise.
- Media Hype: Some stocks become the focus of media attention and this could be the best time to make a profit. These types of frenzies attract investors especially the inexperienced ones and you can take advantage. However, once the hype dies, prices fall as this causes the stock to collapse when prices become too high.
- Growth Stocks Stop Growing: When you invest in growth stocks, they are supposed to grow. However, sometimes they stop growing and it might be the best time to sell as there’s nothing good in holding such stocks. You may need to evaluate the company’s internal workings as well as the market position to understand this phenomenon.
Apart from the above-mentioned reasons, there can be something else that might force you to sell stocks such as…
- The company is being acquired.
- You need the money.
- You need to rebalance your portfolio.
- There is no reason left to hold the stocks.
- There is a better opportunity waiting for you.
Any sale that results in profit is a good sale and the best time to sell stocks. It should be noted that never sell all your holdings and place part of them off the table. If you are getting a good profit, sell a percentage of them and hold the growing ones for a bit longer. This way you are not only making a profit but also mitigating some of the risks.
4. Popular Methods for Selling Stocks
Here are a few methods, as per investopedia, to help you sell your stocks…
- Valuation-Level Sell: In this method, the investor will sell a stock once it hits a certain valuation range. You can use the valuation metrics to understand this scenario such as Price-to-Earnings (P/E) ratio, Price-to-Sales (P/S), and Price-to-Book (P/B).
- Opportunity-Cost Sell: In this method, the investor owns a portfolio of stocks and when sees a better opportunity, sells a stock. However, this requires constant monitoring and research to understand the potential of new stocks.
- Deteriorating-Fundamentals Sell: In this method, the stocks are sold if certain fundamentals in the company’s financial statements fall below a certain level. You need to focus on the balance sheet statement and consider liquidity and coverage ratios.
- Down-from-Cost and Up-from-Cost-Sell: In the down-from-cost method, the sale is based on the amount that you as an investor are willing to lose. The up-from-cost-sell happens when the stock rises a certain percentage.
- Target-Price Sell: This method uses a specific stock value and one of the widely used ways to sell stocks. The common target prices are based on valuation model outputs and many traders will base it on support and resistance levels.
5. The Concluding Words
Choosing when to sell a stock can be a difficult decision as it involves research and understanding of the stock market. While you always want to make a profit from your investment, don’t rush things and sell all of your stocks. Sometimes, it is better to go with the flow and understand the stock market before investing or selling. It is good to work with a reliable broker as only a researched trade can make your profits.
Do some research and make an informed decision!