When To Sell A Stock

There has been an awful lot written about when to buy stocks, but when should you sell? This article examines the telltale signs you should know.

There has been an awful lot written about what stocks to buy, when to buy, and how to find the right mix of stocks for your portfolio. Turn on the TV and you will find more or less sensible analysts recommending this and that, and odds are your stock broker gives you a pitch now and then too. Simply put, we're being flooded with tips and strategies for buying. But how do you know what it is time to sell the stock you already have?

This is where things get harder. You don't want to sell a winner prematurely, as that will have you gnawing your knuckles every time they present another stellar quarter. Imagine having bought Microsoft at its IPO in 1986, then sold in 1987 feeling awfully smug about having doubled your money, only to watch the stock go up by a few gazillion percent in the decade to follow.

On the other hand, if you had Microsoft in early 2000, you probably wish you had sold at $60 instead of year later when it dropped below $25. And let's not even talk about the smaller tech companies that went from three figures to single digits in the same time frame. While the dotcom boom and bust were something of an anomaly, we clearly see the need to keep a close watch on your investments.

First off, you should recognize that it is almost impossible to call a peak or valley. When you sell, there will always have been a few dollars more you could have made. Accept this fact and be happy with the profit you did make, as greed inevitably leads to costly mistakes. You need a clear, rational mind to make good decisions.

Next, follow the earnings reports and check the news headlines. If everything looks good, sit on your hands and feel good about having made a wise investment. However, what you want to keep an eye on is trouble on the horizon. If a competitor launches a new product to go head-to-head with your company's flagship product, it's not good but there's no reason for panic. But if every trade journal in the target industry suddenly starts raving about how infinitely superior the competitor's new product is, it's time to start paying attention.

Likewise, lawsuits are seldom good news - even if your company can fight back the lawsuit, it will drain resources, time and executive focus from the business. SEC probes triggered by potential accounting snafus isn't good news either. If the news story is about the cops leading away the CEO, CFO and half the board of directors, you may consider it one of those subtle hints to sell sooner rather than later.

But what if your stock takes off for the moon? Then it's time to do a reality check. Is this a reasonable increase because the business fundamentals have improved that much? If the answer is yes, sit on your hands and keep your cool. If not, you're probably looking at a bubble. Let's say you've tripled your money. Sweet! However, since you've made the assessment that there really is no reason for this increase, it's time to cash out and leave the table while you're ahead. Sure, in hindsight you may regret not snagging those last few thousands, but on the other hand you weren't there for the 50% drop the following week. Count your blessings and be happy.

Lastly, don't confuse the price you paid with the current value of the stock. It is completely irrelevant if you paid $10 or $100 for a stock currently trading at $50. Do an in-depth analysis and go with what common sense tells you. A good litmus test is this: if you had no shares, would you buy some at $50? If the answer is yes - stay put or buy more. If not, sell. If you bought at $10, you made a $40 per-share profit. If you bought at $100, you lost $50 a share. Either way, your profit or loss has nothing to do with the current value of the stock. If you stubbornly hang on to a loser just because you overpaid for it, you'll probably ride it all the way into the ground. Ask any dotcom-investor from the bubble days.

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