Intro
One of the most common questions I get from you is when should you sell a stock, and this is one of the most common questions that investors ask themselves. So, I’ll try to answer as best as I can.
This is not an easy question, unfortunately, and I wish I could give you an anonymous answer. For example, you should sell when a stock has fallen by 20% or when it’s up by 50%. But there’s no such specific answer, unfortunately.
It all depends on why you bought the stock in the first place and on your specific situation. There are three types of investors in the stock market, or three types of sellers if you will.
Fundamental Analysis
One is basing their decisions on fundamental analysis. This is when you look at the fundamentals of a company, such as key figures like the P/E ratio, for example. The other is basing their decisions on technical analysis.
This is when you go in technically and analyze patterns in the stock’s price data. And the third seller type acts more randomly. What I mean by the seller acting more randomly is that they’re acting out for other reasons that are not related to the stock market or the specific stock.
They’re just acting regardless of how things go for the stock. For example, they need the money right now for something else. Something in their situations may have changed.
Maybe they have achieved their saving goals and they want to use their money to buy a house, for example, or a car, or whatever they want to use their money for.
Investment Horizon
First of all, there might be reasons to sell if something has changed in a situation. You may not need the money right now, but you plan to use it in less than 10 years.
Then you need to consider whether you have the right level of risk and maybe sell some of your shares, at least depending on how soon you plan to use your money. Then other reasons are more related to the stock and the company.
So, the first reason is when a stock has performed well. If you invest in a stock according to fundamental analysis, one reason for selling may be that the stock has reached its intrinsic value.
Stock Price and Intrinsic Value
If you bought a stock based on fundamental analysis, you have often set the right value for what you think the stock is worth. If we take a simple example, imagine that someone bought a stock because it had a low P/E ratio.
A low P/E ratio compared to other companies in the same industry may indicate that the stock is undervalued, and this is what we want to find with the fundamental analysis: undervalued stocks. So, say that someone has bought a stock with a low P/E ratio.
The P/E ratio for this stock maybe 8, while others in the same industry have a P/E ratio of around 14. Then you may want to sell the stock when the price has risen so that the P/E ratio is closer to the industry average of 14 and it’s no longer considered undervalued.
Now, I only made these values up, so don’t follow these numbers exactly, and don’t just buy stocks based on the P/E ratio either.
Through a fundamental analysis, you can use different methods to compare stocks with each other, and there are also different methods to calculate what the correct value or the intrinsic value of a stock should be.
Market indicators and changes
And then other parts of the fundamental analysis can also help determine when the sellers are in stock. It’s not only the actual value of the stock that you want to look at, but you may also want to look at what’s going on in the world.
For example, there might be something happening that might make a specific stock fall. For example, there are some stocks called cyclical stocks, which perform better or worse depending on where in the business cycle we are in.
In light of this, many want to sell these stocks, which are very dependent on the business cycle. If we’re entering a recession, these are manufacturing stocks, for example, or companies that sell more of a luxury product or something that we buy less of as consumers if we have less money.
Macroeconomic Changes
Then there are other macroeconomic indicators as well that can affect companies differently, and this might be interest rates, for example, or where the inflation is at.
So, try to consider how the companies that you bought shares in will be affected by different macroeconomic changes and keep an eye on these factors to see if they can affect them. The industry a company is acting in will also play a big role.
For example, you may want to sell because you no longer believe in an industry or a product that a company sells. It may be a product or industry that is in decline and has been replaced by new products where you no longer believe that there is any potential for the company and the stock.
Technical Analysis
Then we have those investors who use technical analysis. And in technical analysis, there is also a whole range of selling signals that indicate when you should sell stock according to different criteria.
One of the simplest strategies, perhaps, in technical analysis is to look at where the stock price is about its moving average. This is what is called MA. So then we can look at the moving average over different periods, usually 20, 50, or 200 days.
Investment Strategy
A sell signal for a person investing in stocks according to technical analysis may. For example, be that the stock price crosses one of these moving averages on its way down.
Then there are yet other reasons to sell that don’t completely fall within these two analysis methods or that are used in combination with these strategies.
One reason for selling may be that you want to sell according to your investment strategy, not because. For example, you’ve seen these technical signs or the fundamentals behind the company have changed.
Portfolio Management
But it may also be because you have an investment strategy where you say you want to own 20 stocks in a portfolio. And then you want to own equal proportions of each stock in your portfolio. So each stock would make up about 5% of the total portfolio.
If one of the stocks has risen more than the others, this stock suddenly may represent 10% of the portfolio. Then you may want to sell some of it so that you level out your portfolio again so that all stocks again make up 5%.
So this may be one of the reasons to sell a stock, and that leads you to reduce your risk because you don’t want all of your money in a single stock. This is a very risky move.
Speculative Risks
A stock that has gone up quite fast for no apparent reason, such as a good PM with some info that obviously would raise the price.
In my experience, these stocks also tend to go down quite quickly again, maybe not down to where they started but a bit at least. Especially when you see this so-called exponential development of the price.
If you own a stock where the price has risen more by speculation than by the fundamentals or maybe technical indicators, it might be time to consider whether the current price is reasonable and sustainable.
Finding better opportunities
Another reason, regardless of investment strategy, maybe that you have found a better stock or a better investment opportunity. And when you think you can get a better return, then this is a good reason to sell.
And if you’ve been following my channel for a while, you probably know that I mostly invest in index funds, but I also have some individual stocks.
Conclusion
There are so many different investment strategies that it’s difficult to cover all the events that you might want to sell in this post. But I want to point out together that it’s very good to at least have a strategy as opposed to buying stocks randomly based on your feelings.
Then it would be less random in all the buying and selling that you do. Even if no strategy will always be the best or the most optimal. I think you will do better if you use a proven strategy rather than just buying and selling based on how you feel right now about a stock.
Reviewing underperforming stocks
But what should you do if a stock simply is not performing well, even though your investment strategy indicates that this was a good buy?
Most of the reasons we have talked about so far have been when you want to sell a stock that has gone up, but you might. Of course, also want to sell a stock that has simply underperformed or produced a negative return.
The first thing you should look at is how the stock market is doing in general. What is the index returning? If the whole stock market has gone down, then it’s not surprising if your stock is also going down.
Warning Signs
Then there are also some warning signs from companies that you can keep an eye out for, which signal that it might be time to sell. It could be, for example, if a key person, such as the CEO, suddenly leaves the company for one reason or another.
This often signals that everything is not entirely as it should be in the company. Other signals can be when reports are postponed for some reason. It sometimes happens that someone in a leading position is prosecuted for a crime or that people in leading positions sell off large parts of their holdings.
This signals that everything is not going as it should in the company and that these people do not believe that the stock of the company has a good future.
Utilizing Stop Loss
If you want to protect yourself a bit from downturns or don’t miss out on sudden upturns, then you can use something called a stop-loss.
When you use a stop-loss, you can set a certain value or a certain percentage as a kind of protection level, and if the share price reaches this value, it should be sold automatically.
Conclusion
Did you buy stocks without doing an analysis, and now you’re wondering when to sell? But don’t worry; you can simply choose a method right now and start doing your analysis.
So, what are you waiting for? Get started! The reading is over now, and make sure to let me know how it went down below. And I’ll see you all next time.
