When to Sell your Stock
So, when you should sell your stock? Your stock sell strategy is just as
important as your stock buy strategy. After all, you will not make a profit
until you sell your stock.
It seems everyone has their
preferred way to buy a stock. Every investment newsletter lists stocks to
buy now; your broker has her favorite "strong buy" list; your friend at work
has his "can't miss" stock to buy now; heck, even the taxi driver has their
favorite stock idea.
Two things can happen to a stock. It can go up and you will have an
unrealized gain. Or it can go down and you will have an unrealized loss.
Let's assume you are each right with your picks and your stock has gone up. Now what. Do you
keep holding, hoping it will continue to go up? Do you sell it all, or maybe
sell some of it?
On the other hand, not every stock you buy will perform as expected. What do
you do when the price falls? Hold it hoping for a rebound? Do you sell it?
These are all good questions. To bad none of the people who give you the
stock tip told
you when to sell. Up until now any gains or losses you have are unrealized and exist
only on paper. Only through the act of selling will you actually realize any
profits or losses from your investments and trades. Now, if you only knew what to sell
and when to sell it.
There are three important factors to consider when developing your stock exit
strategy:
- The length of time you expect to hold the shares. Day traders have very
short time frames and will look to sell quickly, usually before the day is
over. While some investors want to hold for more than a year to take
advantage of longer term trends.
- Capital to put at risk. One of the most important decisions an investor
makes is how much capital they will put at risk with each position they
take. the amount to put at risk depends on several factors, though most
professionals rarely risk loosing more than 4% of their total capital on any
one trade. the norm is 1 to 2%..
- Expected price movement. When planning our trades, we identify the the
first and second target exit prices as well as the trailing stop. These
prices bracket the trade identifying the expected price movement for the
stock. These price points are the culmination of our fundamental and
technical analysis of the stock using our
Beat the Market
approach.
After considering these three factors you end up with five reasons to
sell your stock:
- The price has reached your predetermined first exit target that you
established when doing your homework before you made your purchase. As a
general rule we sell half of our position in the stock to capture 50% of
the unrealized profits. Selling half of our position provides new
capital to invest in other opportunities. the remaining gain is
protected by a trailing stop that is above our entry price. This
technique allows the other half to keep running until it hits our second
target or the trailing stop is activated. In either case we have a good
probability to realize additional profits with very little risk.
- The price drops back down to your trailing stop order that you have
set according to your stop rules. Not every stock perform as expected.
When this takes place it is prudent capital management to close the
position. We also assess what went wrong so we can
learn from our mistakes
on how to improve our trading.
- You need the money for some other purpose such as buy another more
promising stock, to invest in some other asset or for some other good
reason. In this case make an assessment to determine which stock in your
current portfolio offers the least potential for further gain.
- As a part of good capital management you wish to realize some of the
gains and reduce your holdings of this stock. As already mentioned we
sell half of our position when the price of a stock reaches its first
target. It is always good to take some profits and this technique helps
to enforce this rule.
- You have reached the end of the time you gave for
this stock to perform and you believe there are better opportunities.
Exit targets help to remove the emotion of holding on to a stock past
its expected gain. When our stock reaches its second exit target we
close the position and move on to another more promising opportunity.
Stock sell strategies are an important part of any investors tool kit.
Knowing when to sell your shares of stock is an important technique to
employ.