In my last post I started talking about what I consider the most difficult part of the stock market investing game; SELLING. In that post, It's Hard To Say Goodbye, I presented my Thoughts about the first of three aspects of selling stocks -- What To Sell. In this post I will continue that thought process and talk about When To Sell, and How To Sell.
A quick recap; I break down what to sell into three broad categories:
A quick recap; I break down what to sell into three broad categories:
- Sell something that is showing a profit
- Sell something that is not showing a significant profit or loss
- Sell something that is showing a loss
Let's talk about selling something that is showing a profit. I can see a few reasons to sell.
The stock price has stalled. Important considerations in this situation are the fundamentals of the company, it's medium to long term outlook, and if the company pays a good dividend. A strong stable company, a company that has good things expected in the near future, or a company that pays a dividend that is above average, especially when compared to other companies in the same industry group would be worth holding. Lacking two or three of these factors would be reason to sell out. I would pick a day that the entire market is in a good mood and get out with the profits.
The company has been rated poorly for reasons related to its fundamentals, the market, the economy, or geo-political factors. A stock in this situation can be very confusing. The market being irrational as it is, a stock that should not be doing well anymore could still be on the way up! If this is the situation you find yourself in, I would recommend a sell order with a trailing stop to protect your profits. of course if the broader market has gotten wise to the companies troubles and the stock is starting to reflect that by heading down, I would sell it quickly to secure your profit.
With a little consideration it's obvious that selling something that is not showing significant gains or losses has the same parameters as selling something that is showing a profit.
What are your signals for selling stocks that are profitable or flat? WhatSayYou?
This brings us to the most difficult subset of selling stocks. Selling something that is showing a loss. Here are some Thoughts on why you should sell:
A stock that has dropped significantly can take just as long or even longer to recover. This means if you sell the stock and put the proceeds into a stock that is doing well at the moment you are more likely to recover your loss faster than staying with the loser.
Your losses from a stock sale can be used to reduce your taxes. In some cases, stock losses can be written of in your taxes for the year. There are fairly restrictive rules for this, so be sure to check with a tax consultant. But you may be able to use the tax write-off to offset your loss.
The climb back up is longer than the distance of the slide down! Consider this, if you bought a stock at $100 and it has slid down 33% to $66; for it to recover the $33 to get back to $100 the stock has to climb up 50% of its current value of $66. The same $100 stock at a 50% loss to $50 has to double itself (100% gain) to get back to where it was before. This is a fact that can easily be missed and can cause you to hold on to false hope of a recovery.
The company has hit hard times due to bad management, the market, the economy, or geo-political factors. The stock market is a hidden information game; you will never know all the facts until they have hit a company's stock in adverse ways. In these cases you might be better off realizing that everyone makes mistakes sometimes, or gets hit by badly timed purchase once in a while. Take your lumps and your remaining capital and put it in something that will help you recover from the misfortune.
In the case of a loss making stock, once I have decided to sell I would sell out quickly if the stock is actively losing altitude, or pick an up day to sell if it has plateaued out at a lower price than purchase price.
I'm sure there are other reasons to sell stocks that are down. Have you sold stocks at a loss? What were your reasons? WhatSayYou?
OK, enough with the long thought filled posts. I promise I'll get back to business of buying and selling in my next post, because there are a few to report!
Keep on reading.
The stock price has reversed and is going down. An important bit of information to consider in this case is if the stock is going down with the entire market. If that is the case then you need to decide how much of the downtrend you are going to ride out and if the stock is strong enough to recover quickly when the broader market makes a recovery. If the stock is going down against the general trend of the market, it may be time to take your profits and move on,
The stock price has stalled. Important considerations in this situation are the fundamentals of the company, it's medium to long term outlook, and if the company pays a good dividend. A strong stable company, a company that has good things expected in the near future, or a company that pays a dividend that is above average, especially when compared to other companies in the same industry group would be worth holding. Lacking two or three of these factors would be reason to sell out. I would pick a day that the entire market is in a good mood and get out with the profits.
The company has been rated poorly for reasons related to its fundamentals, the market, the economy, or geo-political factors. A stock in this situation can be very confusing. The market being irrational as it is, a stock that should not be doing well anymore could still be on the way up! If this is the situation you find yourself in, I would recommend a sell order with a trailing stop to protect your profits. of course if the broader market has gotten wise to the companies troubles and the stock is starting to reflect that by heading down, I would sell it quickly to secure your profit.
With a little consideration it's obvious that selling something that is not showing significant gains or losses has the same parameters as selling something that is showing a profit.
What are your signals for selling stocks that are profitable or flat? WhatSayYou?
This brings us to the most difficult subset of selling stocks. Selling something that is showing a loss. Here are some Thoughts on why you should sell:
A stock that has dropped significantly can take just as long or even longer to recover. This means if you sell the stock and put the proceeds into a stock that is doing well at the moment you are more likely to recover your loss faster than staying with the loser.
Your losses from a stock sale can be used to reduce your taxes. In some cases, stock losses can be written of in your taxes for the year. There are fairly restrictive rules for this, so be sure to check with a tax consultant. But you may be able to use the tax write-off to offset your loss.
The climb back up is longer than the distance of the slide down! Consider this, if you bought a stock at $100 and it has slid down 33% to $66; for it to recover the $33 to get back to $100 the stock has to climb up 50% of its current value of $66. The same $100 stock at a 50% loss to $50 has to double itself (100% gain) to get back to where it was before. This is a fact that can easily be missed and can cause you to hold on to false hope of a recovery.
The company has hit hard times due to bad management, the market, the economy, or geo-political factors. The stock market is a hidden information game; you will never know all the facts until they have hit a company's stock in adverse ways. In these cases you might be better off realizing that everyone makes mistakes sometimes, or gets hit by badly timed purchase once in a while. Take your lumps and your remaining capital and put it in something that will help you recover from the misfortune.
In the case of a loss making stock, once I have decided to sell I would sell out quickly if the stock is actively losing altitude, or pick an up day to sell if it has plateaued out at a lower price than purchase price.
I'm sure there are other reasons to sell stocks that are down. Have you sold stocks at a loss? What were your reasons? WhatSayYou?
OK, enough with the long thought filled posts. I promise I'll get back to business of buying and selling in my next post, because there are a few to report!
Keep on reading.
