When to Sell Stocks

When you’re making a trading decision it is not always about profit and loss. There can be many reasons to buy or sell an asset. Here are some reasons you may want to consider selling a stock.

Reasons to sell a stock

Rebalancing your portfolio

Rebalancing your portfolio is the process of selling and buying assets to ensure you are matching your ideal asset allocation. Effectively, rebalancing locks in some of your profits and allows you to purchase more of your investments that haven’t done as well.
As a hypothetical, consider a portfolio with two investments that are split 50% each. Company A’s share price goes up and Company B’s remains constant. The asset allocation changes to 60% of Company A and 40% of Company B rather than 50/50. In order to rebalance the portfolio, the investor would sell some of Company A and purchase some more of Company B until the is split 50/50 again.

Your investment no longer matches your risk tolerance

Your risk tolerance can change over the years, especially with changing financial circumstances. So, if an investment you’ve made is keeping you up at night, or perhaps has become more volatile than before, it likely no longer suits your tolerance for risk, and is a good reason to sell.

 Related article: 6 Different Investment Styles – Which one is right for you.

Your investment has changed

When you invest in a company you should have a clear understanding of how they make their money and their plans for future growth. It’s a good idea to keep up-to-date with the company’s future plans and their current financial situation. If the company makes a fundamental change that it no longer represents why you invested in the first place, you may want to consider selling. These changes could be a sudden change of direction, being acquired by another company, or branching into another industry etc.

You have a reached your investment goal

When you invest it’s a good idea to set an investment goal, which should inform your overall investment strategy. For example, You may have a short-term goal, like to establish funds for a house deposit or perhaps a long-term goal to create a nest egg for retirement.

Market movements are often difficult to predict, you can never be sure if a downturn is around the corner, so if you’ve reached your goals it might be a good idea to de-risk your portfolio by exiting the market and moving to a less risky investment option like fixed interest or cash.

When should you sell a stock for profit?

The famous saying goes: buy low and sell high. But, there’s always the risk of cashing out early and missing out on future growth, and without a crystal ball, deciding when to sell purely for profit can be tricky.

One thing you can do is to set a profit goal for each investment. For example, you might say that when Stock A’s value reaches $20,or when it doubles in value it’s time to sell. This can be a simple way to manage your trading decisions.

Although, keep in mind that any trading decision you make should be informed by your overall investment strategy that should take into consideration your overarching investment goals.

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