How do you know when to sell a stock?

when Stock market If you encounter difficulties, it can be tempting to sell and exit. It’s hard to watch your investments decline week after week, and exiting – even at a loss – can give you relief, even if you don’t keep seeing your next egg dwindle.

In the event of selling shares Market decline It can temporarily relieve you, doing it as a reaction to a stock drop is not a Good investment strategy at the long term. Volatility is a normal part of it Investing in the stock marketso expect occasional declines in the market.

Let’s take a closer look at when you should or shouldn’t consider selling a stock.

Reasons to sell shares

1. I found the best

Investing is ultimately about getting the highest possible rate of return while taking the minimum amount of risk.

Investment opportunities evolve according to the characteristics of companies and market prices. If you own a stock, but have found another investment – perhaps another stock or something else – that seems more attractive to you, it might be a good idea to sell what you own in favor of a better opportunity.

2. You made a mistake

Mistakes happen, and the sooner you catch them, the better. Sometimes it turns out that the company is not the one you thought it was stock purchase. Perhaps it is facing tougher competition than you thought, or its position is getting worse instead of better.

The economist John Maynard Keynes said that when the facts change, you have to change your mind. Mistakes can be hard to admit, but you will be better off as an investor if you recognize them early and exit your position.

3. The company’s business outlook has changed

Companies are dynamic and their future success will not be guaranteed. Companies that achieve high returns on capital often face fierce competition that can bring their returns back to more normal levels. Other times, companies are completely disrupted by new innovations that threaten their very existence.

The fortunes of traditional bookstores changed overnight with the arrival ofAmazon In the ’90s, if you owned Barnes & Noble stock at the time, you would have had better sell it before the business went under.

4. Tax reasons

If some of your investments are loss-making, you may consider selling them to take advantage of a strategy called “tax loss harvesting.” This approach allows you to save on your tax bill by offsetting income and capital gains for your losses.

But try not to let tax considerations guide your investment decisions. Buying and selling strong companies for tax or other reasons often leaves you in a worse position than if you had held the stock for the long term.

5. Rebalance your portfolio

If a stock is doing particularly well, you’ve probably noticed that it represents a larger share of your overall portfolio than it did when you bought it.

If this stock is too big for your portfolio, you can consider reducing it to a lower weight by making Portfolio rebalancing. This can help your portfolio maintain a good allocation and avoid getting too exposed to a single stock.

But beware of rebalancing too much, or you could end up selling companies that are doing well over and over again and adding others, which for some investors is like “cutting the flowers and watering the weeds.”

6. The evaluation no longer reflects the reality of the company

Sometimes, the markets are overly optimistic about a company’s future prospects and its share price reaches unsustainable levels. When the share price reaches a level that cannot be justified by the best estimates of the company’s future performance, it’s time to sell your shares.

There are countless examples in history where market prices have outpaced a company’s fundamentals, causing stocks to underperform for years to come.

In the late 1990s, many technology companies were pushed to levels not justified by their fundamentals. Companies like Cisco and Intel have yet to reach the levels they reached in the early 2000s, despite relatively strong business performance.

7. You need money

If you think you need a large amount of money in the near future, you probably shouldn’t invest it in stocks. But there are things in life that can create a need to raise money from a source that would normally have been intended to be invested for the long term.

Create an emergency fund An important first step in any financial plan, but sometimes that fund runs out and you need quick access to cash. If circumstances force your hand, you may want to consider selling a stock to meet an immediate need.

Bad reasons for selling stocks

1. The stock went up

The saying goes that no one gets bankrupt by taking a profit, but selling just because a stock goes up is not a good investment practice. Some of the most successful companies in the world are able to grow investors’ capital for decades, and those who sell too soon end up missing out on years of future gains.

companies like Are you hereAnd Microsoft and countless others made early investors many times their money. Don’t sell just because you win.

2. The arrow has fallen

On the contrary, it should not be sold because the stock has fallen. In fact, it might be a reason to buy more if your original reasons for buying the stock are still intact. If the facts don’t change, this could be an opportunity.

Markets rise and fall for a number of short-term reasons, which creates potential opportunities for real investors over the long term. An attractively priced stock can always become more attractive, and that’s a reason to buy, not sell.

3. Economic forecasts

Markets and traders are never short of worry. There are always those who predict a recession or a doomsday scenario. Most of the time, these expectations should be ignored.

Remember that investing is a long game and don’t sell it just because someone expects it economic downturn.

4. Short term interests

Many market guides are willing to give their opinion on where the stock will go tomorrow, next week, or next month. Actually, no one knows. These well-trained forecasters often make very convincing arguments for why a stock will behave one way or another over the next few days.

But remember that companies, and therefore stocks, are ultimately entitled to the cash flow they produce over their remaining lives, discounted at an appropriate interest rate. The following week or month generally has no effect on the intrinsic value of the stock. Try not to get carried away by market commentators and their short-term expectations.

Conclusion

It’s not easy to decide when to sell shares, but try to focus on the underlying company’s performance, competitive position and valuation.

Try to avoid predictions from so-called experts who claim to know what will happen in the short term. Finally, remember that stocks are ownership stakes in real companies and that their long-term earnings will determine your return as a shareholder.