How to decide when to sell a stock?

Jun 23, 2022

Level: Beginner

Reading time: 4 min

There are a huge number of articles and materials on the Internet about how, when and where to buy shares. However, one of the most important and exciting moments for a novice trader is the choice of the best time to sell stocks.

It’s crucial to understand the planning horizon: the shorter the time frame, the “safer” should be your portfolio. On a super-long-term horizon of several decades, holding on to the stocks that were bought even at the worst possible moments has, in fact, proven to be a profitable strategy. Will the future market dynamics resemble the past? Not necessarily, but we do need to incorporate this knowledge in our strategy.

Let’s look at four main strategies that can help investors make the right choice and make a dollar rather than lose a cent.

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Equity portfolio rebalancing

The first strategy that tells a trader when to sell a stock for profit is portfolio rebalancing. Rebalancing is a process when a customer sells those shares that have grown too much and their volume in the portfolio exceeds the limits that were previously set. For example, experts recommend keeping securities of huge companies in the portfolio in the amount of no more than 5%. An example of such a brand is Microsoft.

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This weight of 5% of the portfolio should be allocated to the most profitable firms, but due to a small share, investments will not depend on the dynamics of individual shares. Thus, the investment portfolio becomes more resistant to unforeseen situations. The ideal option is to make a sale of stock once a quarter so that the proportion of securities goes back to 5%.

Obtaining super profits

Another strategy that helps to understand when to sell shares is vending after making surplus income. That is, customers need to monitor the situation and as soon as the level reaches 100%, it means that it`s worth getting rid of half of the shares — this will allow you to instantly get back all your invested funds. The remaining part is essentially the investment amount you obtain for “free”, so you can keep trading with it for a longer time or withdraw it after it increases in value.

The emergence of serious fundamental risks

Fundamental risks are basically laws that limit the scope of activity in the industry where a company operates. For example:

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for tobacco brands: a reduction in the number of places for public smoking;
for the beauty industry: a decrease in the market share of those firms that test their products on animals;
for oil companies: a toughening of many environmental regulations;
for jewelry companies: the emergence of numerous laboratories producing man-made diamonds of the same quality, etc.

In addition, any litigation can be a serious risk. Thus, if clients see any suspicious activity related to the company whose shares they own, it’s time to get rid of the stock bought and “sell a problem”. In such a situation, cutting losses is more crucial than a profit.

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Reaching the investment horizon

The fourth strategy to help determine how to decide when to sell a stock is reaching the investment horizon. When creating an investment portfolio, customers should be sure to indicate a specific goal and planning horizon. As soon as the given limit is reached, but the stock is far from the expected price, it should be sold.

This strategy was used by those who actively invested in Xerox in the hope of the price returning to pre-pandemic values. However, a year and a half later, the company showed critically poor dynamics — this is why customers began to sell off their assets on a mass scale.

Conclusion

Let`s crown it all. It is important to understand that in addition to the classic strategies that describe the main situations when to sell stocks, the specifics of each unique case need to be considered. In addition, when buying company shares, you should consider an exit strategy in advance. Keep an investor diary in Excel or another specialized application. And remember that a portfolio is not a static structure, it requires your attention for rebalancing.

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