Considerations before selling a stock
Investing and trading are two very different worlds where there are diverse ways of earning profits. Usually investors earn profit in an extended period of time by means of buying and selling whereas traders take on the advantage of rising and falling markets and exit the market in a shorter time period. While buy and hold strategy builds wealth, trading generates returns that is intended to outperform buy-and-hold investing. One basic rule of investing all of us should consider while investing is buying low and selling high. But volatility is one important factor which has to be considered; it is quite unpredictable! Why would someone consider selling a stock? The questions below might help you understand the rationale of what can trigger someone to sell a stock!
Have you lost a lot of money from your investments?First and fore most question you should ask yourself is what your risk tolerance is. Losing money is fine till you can bear the loss. If you have a particular goal in mind it is important you achieve the goal and then you sell your investments. Holding onto stocks for continuous returns in the form of dividends may increase the overall risk of the portfolio and may lead to lower total returns in times of market correction.
Is there a change in the purpose of investing?A usual investor buys a stock because it is low or reasonably priced, the company has delivered good financial performance, the outlook is positive due to launch of new services or products or it could be a blend of all of these triggers. If a stock price has soared up without any reason or which rationale fails to justify, then one should consider selling a stock.
Is there a need for rebalancing?Before making an asset allocation, portfolio managers usually make an IPS (Investment Portfolio Statement) wherein they note down the risk tolerance, constraints and requirements of each investor. If in case a portfolio’s asset allocation goes beyond the desired parameters, they usually rebalance it and might sell some stocks.
Are there are tax consequences?Most people make investments taking into account the tax considerations. Any profit gained on investments is subject to tax, which creates an issue. Transaction costs and taxes reduce the amount of gains which should be taken into consideration before the investor sells the securities.
Is the benchmark Index falling?Companies usually declare their results after specified periods of time such as a quarter or a half-year which reflect their financial performance. There have been cases when markets have performed exceptionally well and there have been times where the stocks have plunged. This happens if the industry or economy is caught in the midst of a slowdown. Thus, if there is a decline in the industry index, investors usually sell their stocks in order to avoid the downfall risk.
The above mentioned are some reasons which might trigger someone to sell a stock but before taking a quick action or panicking, there are some pointers to keep in mind before selling a stock:
1.) It is important to not to be influenced by small changes in the market. Set some range in your mind and know what the bottom of your range is. Knowing your exit point will help you to decide where to book your profits and will work in your favour. Stock market is very volatile and may go up and down in no time. Acting on every movement would result in a lot of transaction costs and would end in losses rather than the gains. It is also important for an investor to understand the business model before investing in a stock so as to do away with securities which have uncertain future.
2.) Know that your profit is not a profit until and unless it is cashed out. If a stock is consistently rising and is giving you unexpected returns, it is the time you book your profits too. Waiting for the stock to rise will keep you waiting too. Markets may go down in no time and you will be left with nothing. Again, as mentioned before, know what your goal is. Once it is achieved, it is safe for you to exit the stock. Another important thing to consider is not to try to time the markets, meaning buying stocks when there are at their lows and selling them at their highs. This might sound good in theoretical books on the subject, but it is very hard to generate profits using this strategy in the real life. The biggest risks here is you tend to miss the lows and by at higher prices. This strategy can work only when you are more informed than the market participants, which is rare.
3.) The most difficult part of investing is keeping your emotions out of the game and not making decisions on the basis of what everyone else is doing. This strategy may turn out to be costly; so, it is important to have a set plan in place. Do not panic and overreact; a company cannot be built on thin air or without any basic competencies. Don’t be afraid in going against the crowd and not trade on the basis short term noises. Yes, selling a stock can be good idea if the reason you bought the stock no longer holds. Writing down the reasons for buying and selling will give you an idea if you are ready to trade on your stock.
4.) Another thing before selling a stock is to make sure that there are better alternatives for you to invest. If you have better stocks to invest in, than it is good if you up on the weaker ones. But do not pick up stocks if you are not sure about them and be informed about the costs of owning the latter one. Transaction costs can cut down your profits and may not fit in your financial goals. Most brokerages charge you a commission when you buy and again when you sell stocks. This will continue to add to your costs that are going to be added to the stock’s share price and increase your cost of acquisition.
5.) One Last tip is to assess the volatility of your stock. See how it has performed in both the long and short runs. This will help you in taking rational decisions.
This website is a service of Kalkine Media Pty. Ltd. A.C.N. 629 651 672. The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine Media does not in any way endorse or recommend individuals, products or services that may be discussed on this site. Our publications are NOT a solicitation or recommendation to buy, sell or hold. We are neither licensed nor qualified to provide investment advice.
There is no investor left unperturbed with the ongoing trade conflicts between US-China and the devastating bushfire in Australia.
Are you wondering if the year 2020 might not have taken the right start? Dividend stocks could be the answer to that question.
As interest rates in Australia are already at record low levels, find out which dividend stocks are viewed as the most attractive investment opportunity in the current scenario in our report.