So the time has come for you to unload that investment. Regardless of whether it’s a dud, a stud, or hitting the ground with a thud, selling stock breaks down to a simple procedure that need not intimidate the neophyte investor. The modern world of app-fueled investing makes selling a stock nearly as easy as streaming songs on a smartphone. If you’re more the flesh-and-blood type, working with a trusted financial advisor can be equally stress-free.
- There are three types of sell orders to choose from when selling your stock.
- It helps to work with a financial advisor to understand your stock’s value better if you’re unsure.
- There are many techniques for helping you decide when to sell a stock, but the best one is to set a target price and sell the stock when it hits it.
Types of Sell Orders
The most basic way to sell a stock comes through what’s called a sell order. Once you know you're going to place a sell order, you've got to decide what type of sell order you'd like to place. The main types of sales-related orders include:
- Market order: These orders are sold nearly instantaneously at the current market price. The benefit is that orders are executed as quickly as possible. The downside is that you'll have to accept the lowest buying price currently offered on the market.
- Limit order: These orders set a minimum acceptable price, and the stocks will only sell if a buyer's offer hits that price (or goes higher). The benefit is that a seller has more of a guarantee as to the price they'll receive. The downside is that your order could languish in a long line of pending orders.
- Stop order: These orders will only sell a stock if the price drops to a seller's chosen level. The benefit is that it's a kind of insurance policy against a stock plummeting in value—you'll automatically sell your position once it hits the lowest price you're willing to accept for the stock. The downside is that these orders are usually placed with a worst-case scenario in mind, so if the stop order triggers, something has probably gone wrong.
Using an App
If you're already comfortable using phone apps (and if you're reading this on your phone right now), a trading app might be the best way for you to sell a stock. First-time traders are particularly fond of playing the market this way, as many investment apps do not charge commissions on trades. Some apps are offered by relatively new financial companies, such as Robinhood, while traditional brokerage firms also offer their take on trading apps. Each app functions slightly differently, but the simplest layouts will allow you to sell a stock in just three taps. Betterment has also enjoyed success as an app-based way to buy and sell a pre-selected portfolio of stocks.
Working With a Financial Advisor
Assuming that you bought your stock through a financial advisor, either in person or on the phone, you can also sell your stock this way. Financial advisors will typically execute a sell order within 24 hours. Note that, in this case, you must either speak directly to your broker or put your request in writing. As Investopedia notes, “Financial institutions will not accept email or voicemail trade requests as they can be easily missed.”
The Untimeliness of Market Timing
Knowing how to sell a stock is one thing, but how do you know when it’s time to sell a stock? Sound answers to this question vary, but let’s start with the most frowned-upon technique regarding a stock sale: market timing.
Simply put, market timing rests on the theory that you can successfully buy and sell a stock by predicting its future movements. In some ways, it’s akin to the guesswork of watching interest rates on mortgages and betting on the ideal time to lock in a rate.
Most experts contend that market timing is simply a bet because, even in the numerical world of investing, no set of calculations exists that can tell you when to get in and when to get out of a certain stock. Tea leaves, it turns out, may be nearly as precise in predicting market movements.
If you hoped to get in at the right time and succeeded, good for you! However, think carefully before you sell on similar hopes for good luck. Many sellers find it's better to set a dollar target, rather than a timing target. You don't have to formalize it in a sell order—it could be as simple as jotting down your thoughts on a sticky note at your work desk. For example, you may have bought a stock at $20 per share, and set a goal to sell when the stock hits $30 per share.
A Magic Selling Number: 16.5
This digit doesn't refer to any actual magic, nor does it refer to any secret backroom rules on Wall Street. Rather, it pertains to something known as a GAAP forward multiple. GAAP stands for generally accepted accounting principles, and it's a financial standard that public companies use.
The 16.5 strategy goes like this: if you take the earnings per share (EPS) of a company, as determined by GAAP, and multiply it by 16.5, you now have a target price for your sale. So if Carlozo Motors has an EPS of $10, your target sell price would be $160.50.
This formula is based on a 40-year average for equities, and since the late 1800s, the best points to sell a stock have fallen roughly along the lines of this equation.
The Bottom Line
With all the different ways to buy and sell a stock, the barriers to entry for the investment world have never been lower. If you're nervous about whether you should sell a stock, or you aren't sure when to sell it, you can always choose to sit and wait. You should never feel an obligation to sell a stock, and holding onto a stock for the long-term can be a great investment strategy. This is known as a “buy and hold” strategy, and it's favored by billionaires like Warren Buffett and Charles Brandes. When you finally decide to sell, you'll know how to execute the order with just a couple of taps, clicks, or conversations.