When to Sell Your Winning Stock
Make smart trades at the right time
Speculators and investors sometimes do not know when to sell a stock. Many sell their stocks before they peak, others hold on to them in the hopes of a recovery. This begs the question—how do you determine when to sell? It's nice to have some indicators that can help an investor decide the best time to sell stocks.
When investors begin to believe the investment will begin losing value, they tend to take the profit they know they have rather than a loss. Although this may seem counterintuitive, it falls in line with speculator behavior and is how some make stock market decisions. While this appears to be a smart way of keeping your portfolio value up, the stock market has a tendency to rebound—which can continue a stock's winning trend.
Some would counsel to never sell winning stocks (ones that continually recover) while others caution selling them only when using a deliberate process. There are a few tools you can take to help you determine whether a stock should be sold or not. Some tools you can use are fundamental analysis, target prices, trading volume, and watching for reduced dividends. Whichever method you use, it pays to have a stock exit strategy.
Fundamentals Can Indicate Failure
If you have a stock that had a good run, there are signs that it might begin a decline in performance. There are several indicators that can tip you off to changes that could mean the price has started to head south. These indicators usually come in the form of financial ratios.
The company that issued the stock can be measured by conducting a fundamental analysis, which entails analyzing the issuer's financial statements. Financial ratios used in the industry give you insights into a company's performance. This information may be hard to come by unless you receive financial updates from the stock issuers because current financial information is closely guarded by most companies.
Financial ratios are good indicators of a specific company's performance over definitive periods of time. They are only useful for comparing the performance of multiple companies if all companies being compared are in the same industry, have similar internal accounting procedures, and are otherwise comparable to each other.
If you are able to gain financial statement information, you should be able to use measurements such as dividend yield, price to earnings, earnings per share, and dividend payout ratios. Other key ratios that can be used to further your perspective on a company are their debt to equity, the quick ratio, the current ratio or other liquidity (the ability to quickly turn assets into cash) and solvency (the ability to pay debts) ratios.
Many investors set a floor on a stock's price so that if it falls below a certain level, they sell to maintain a profit. You can also set an upper limit that triggers your sale.
Your rationale here might be that you fear the stock will have a difficult time supporting a market price above a certain level and that a hint of bad news might send the price into a nosedive.
Some investors simply say, "I want to make X amount of return; when I hit that, I'm going to sell and move on to another opportunity." This mindset can allow investors to make non-emotional stock-trading decisions that could reward them with higher profits over time by preventing panic-selling.
If Dividends Are Eliminated or Reduced
When companies start cutting or eliminating dividends, it's time to take a serious look into the company's internal workings. As an investor, you should be monitoring the monthly and quarterly performance of the companies that issue your stocks. A company’s dividend cut is a serious event, and it might signal financial issues or changes that investors should pay close attention to.
Dividend investing is the practice of investing in stocks that pay dividends, hoping for continuous income.
Companies are not required to pay dividends, so a dividend reduction doesn't always signify a financial problem—they could be reinvesting in the company, redirecting funds into retained earnings or using expected dividend money for research and development.
Dividend cuts are not always negative—however, if you are only in it for the dividend income, it might be the best time to sell the stock.
Lower Trading Volume
If a stock is suddenly trading at a lower volume than before, it might be an indication of something happening. Stock liquidity is important for investors that wish to sell their nonperforming stocks. If you cannot sell your stock because there are no buyers, you'll have to hold on to it regardless of the swing it takes—and hope the company can make it through it if their stocks take a dive.
Strategies for Selling
Other strategies for selling include some event planning and strategies for the events in case of circumstances that are moving against your stocks, that might indicate a need to take action.
If a stock you own becomes the focus of media attention and receives a lot of investment noise, it may be time to look at taking a profit. These types of stock-feeding frenzies attract inexperienced investors (known as speculators), the result of which is a stock price increase; this causes the stock to collapse when prices become too high to be attractive—the hype dies, prices fall, and you're left with a negative return on your investment.
Growth Stocks Stop Growing
Growth stocks are supposed to grow. When they stop growing or growth begins to slow, it might be the best time to sell. Investors do not look kindly upon growth stocks that fail to maintain their growth.
Don't Sell All of Your Holdings
Place part of your holdings off the table. If you have a good profit in a stock, consider selling a percentage of them, and reinvesting the profits into other profitable stocks; let the remainder continue as they are. This way you can mitigate some of the risks your remaining stocks have while still maintaining a profit. If the remainder begins to flounder, you can sell the stock and get out with some profit.
Be Mindful of Frequent Trading
While you always want to maximize your investment, don't eat into your profits by running up a large commission bill at your stockbroker through excessive trading. A few educated and researched trades will beat a dozen mediocre ones any day.