When to sell your stock

Since no one can time the market, knowing when to sell is one of the toughest decisions, especially since greed usually takes over and you always hope for a higher price.

In theory, the perfect business is to buy a company so wonderful and at a price so attractive, that we never sell it. Of course, this rarely happens in reality. Wondering why?

  • Because not all companies stay wonderful forever  and
  • The market at some point tends to grossly overvalue these companies, giving a sell opportunity.

PRE-DETERMINED RETURN

It’s better for investors to take a conservative approach. Consider selling your stock once you achieve a 20% to 25 % return on investment.

IS THERE A BETTER OPPORTUNITY?

If you have found a better company, where the probability of growth and returns is higher and if that company is available at an attractive discount, consider selling of your earlier investment at the available profit and invest in the new one.

SUDDEN CHANGES IN SCENARIO

Uncertainty is a part of stock markets. If there has been a sudden change in circumstance or you have received new information, that changes your opinion about the company that you once believed was wonderful, consider selling the stock; even though its current price may not have reached your target.

ACCEPTING LOSS

When you value a stock and invest at discount, it’s hard to get into a trap. However, I need to talk about accepting losses here. One of the hardest challenges an investor faces is accepting one’s loss and moving on before the situation worsens. It is much easier to sell and take profit than to sell and take a loss because it is emotionally far easier to leave a position with a win than with a loss.  However, this very behavior puts investors at risk and can quickly lead to depletion of his position.  Therefore, I argue that sometimes it is important to hold onto your stocks when they are going up beyond our target price, not because we are greedy, but because it is important to recognize a trend and take full advantage of the uptrend.  On the other side, it is absolutely critical to recognize the trend down and cut losses early regardless of how hard it is to accept a loss.

The Bottom line is –  don’t hold onto your position too long or too short.  Have a plan both ways and stick to it.

What i said above is not an easy thing to do, specially for fresh investors. Holding the stock beyond the target price and getting out of a position before it’s too late are vital decisions. The ability to take such decisions needs to b developed with time. For that you need through understanding about the particular stock and of the industry and economy in general.

Till my next post …

have a nice time !!

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2 Responses to “When to sell your stock”

Seven

November 3, 2011 at 7:39 pm

Got it! Thanks a lot again for hleping me out!

Anwar

April 7, 2012 at 4:24 pm

hi .. I went through your article….. when markets go down there’ll be many losers in the market.. you have to accept loss. but, where does the money in the market go? :)

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