How To Know When To Sell a Stock

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A strong case can be made that investing in stocks should be an important part of everyone’s long-term financial plan. With the growth of online trading platforms and the widespread availability of credible information from financial websites, social networking and media sources, it’s never been easier to buy stocks.

It’s also never been easier to sell stocks, but selling at the wrong time can cost you some or all of your investment. That’s why it’s important to know when to sell your stock before you invest your money. 

When To Sell a Stock

There is a common investment mantra: “Buy low, sell high.” Unfortunately, the reality is that no one can precisely identify that critical moment when a particular stock has reached its peak or when a broad market sell-off is coming. But there are other indicators that signal when it’s time to sell.

1. When Valuation Is High

A company’s stock price is based on a number of factors. Stocks can get ahead of themselves and rise to unreasonably expensive valuations. When that happens, it might be time to sell.

One of the most popular and effective ways to measure valuation in the stock market is the price-to-earnings ratio, or P/E. The P/E of a stock is calculated by dividing its stock price by its reported or projected earnings. A high P/E — especially as compared to the P/Es of competing companies, and with no obvious reason — reflects a high valuation and could indicate an overpriced stock.

Selling while the stock is overpriced means you can get more than the stock is worth and avoid an eventual correction.

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2. When Rebalancing Is Necessary

Many advisors suggest that you decide on an asset allocation when you first set up a new investment portfolio. Your asset allocation is a guide that tells you what percentage of your portfolio should be invested in various asset classes, such as bonds or stocks. Over time, if one sector outperforms or underperforms the others, your predetermined asset allocation will become unbalanced.

For example, if stocks go on a tear, your original allocation of 60% stocks and 40% bonds can quickly turn into 75% stocks and 25% bonds. In a situation like this, rebalancing is advisable. In the above example, you’d need to sell stocks and add to bonds until your original allocation is restored.

3. When Market Sentiment Is Negative

Market sentiment, also known as investor sentiment, definitely affects how stocks trade. Understandably, negative events in the news can cause investors to feel bearish. When this happens, whatever the reason, the market as a whole might trend downward. In a time of negative sentiment, it can be difficult for any stock to go up in value.

Investors with a long-term outlook can afford to ride out short-term fluctuations, but if your time horizon is short, you might consider selling during market downtrends even if they’re only caused by negative market psychology.

Can You Sell a Stock With No Buyer?

There are investment companies whose only job is to buy or sell stocks of publicly traded companies whenever the market is open. They are called “market makers,” and while they won’t promise that you can sell your stock for the price you want, they exist so you can always sell it. However, if you repeatedly find yourself having to dump stocks because of negative sentiment, you should probably consider reevaluating your overall asset allocation.

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4. When a Company Shares Bad News

If a company is growing, its sales and earnings are up and it’s reporting nothing but good news, the share price tends to rise. Conversely, if a company shares bad news, the stock is likely to go down.

Long-term investors don’t need to worry about stock price fluctuations that are based on short-term news, but if a company’s long-term fundamentals have changed, it might be time to sell. For example, if a company puts out a press release announcing that its dividend payout is slashed or that it has lost a key competitive advantage, it might be better to sell.

Key personnel changes can affect stock prices as well. For example, when Apple CEO Steve Jobs passed away in 2011, the company’s stock fell. Shares eventually bounced back as stockholders gained confidence in the new CEO, Tim Cook.

It’s smart to pay attention to news about companies you are invested in, but try to avoid making major decisions until you have the full picture.

6. When the Stock Has Done Its Part for Your Personal Financial Goals

When should you sell a stock for profit? If you’ve owned a stock for a while and it has increased dramatically in price, you may be hesitant to part with it. Don’t be.

Sometimes, a perfectly good reason to consider selling a stock is simply to make a profit. There’s no magic formula for how much profit to take — that’s a personal decision you should base on your investment goals and appetite for risk.

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For example, if you bought a stock with a goal of achieving a 10% return in a year and the stock shot up by 25% in a few weeks, you may want to think seriously about selling. Sure, the stock might continue to go higher, but, as long-standing market guru Jesse Livermore once said, “No one ever went broke taking a profit.”

Drastic outperformance by a single stock in your portfolio is also likely to throw off your asset allocation, which is another reason to sell and reallocate those assets.

7. When You Need a Tax Break

Nobody invests in stocks to generate losses, but there are times when selling for a loss can actually help you by reducing your tax burden. Selling underperformers also helps by offloading stocks that are doing nothing but dragging down your portfolio. So what does that mean in terms of percentage losses? Experts say that a 7% to 8% drop is a clear sign to sell.

When it comes to selling losers, the good news is that the IRS allows taxpayers to offset taxable capital gains with realized capital losses. If you took a profit earlier in the year and are dreading the upcoming tax bill, you can sell stocks that are trading at a loss and at least partially cancel out the gain. The strategy is called “tax-loss selling,” and it can significantly reduce your tax burden while you shed your weaker holdings.

When Not To Sell

A few days of declining share prices prompt some investors to panic-sell their stock. That’s almost always a bad idea. For one thing, it guarantees that you’ll lose money. And if you want too long to buy back in, you might never recover those losses. 

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Take, for example, investors who had their money in stocks from 1980 to February 2022. They saw a 12% annual gain on their investment, according to Morgan Stanley. Had they sold after market slumps and waited two years to reinvest, they would have averaged just 10%.

There are plenty of good reasons to sell, but a market downturn isn’t one of them. However, it could be an excellent time to buy.

How Long Should I Hold a Stock?

Day traders often sell a stock just hours after they’ve purchased it. Long-term investors sometimes hold a single stock for decades. Your time horizon will be determined by your goals and the performance — or nonperformance — of the stocks you choose.

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Here are some quick answers to common questions about selling stocks.
  • How do you decide when to sell a stock?
    • Deciding to sell a stock is complicated, but ultimately, it comes down to whether the stock is serving your financial goals.
    • If, for example, the company has just shared negative news about its prospects, the stock may no longer earn you a profit, so it could be a good idea to sell before it drops too far. Or perhaps the stock has simply met the return goal you set for it, so you might sell the stock to rebalance your portfolio.
  • What is the best time to sell stocks?
    • The best time to sell a stock is, of course, at its peak, so you make the most profit. However, it's impossible to judge exactly when that peak will be, so you should sell stock that is no longer meeting your financial goals.
    • Just don't panic and sell too soon – for most people, the stock market is a long-term game, and many stocks that go down end up higher in the future.
  • At what percent should you sell stock?
    • There is no set percentage at which you should sell your stock. Ultimately, it depends on your goals and comfort level.
  • Is it better to sell stocks when high or low?
    • It's best to sell stocks when they're high to make a higher profit. The exception, however, is if a stock is failing entirely and has reached a low point you are not comfortable with. In that case, it might be best to sell and cut your losses.
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Daria Uhlig contributed to the reporting for this article.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.


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