When to Sell a Stock: 5 Tested Tips
Knowing when to sell a stock is essential when investing. Selling too early or too late can mean collecting less in returns than you otherwise could have, or even realizing a loss!
Read on for a few simple tips that you can use to help realize maximum returns on your stock trades.
Set Loss Limits
One of the simplest ways that you can ensure that you sell at the right time – or at least sell before the wrong time – is to set stop-loss orders. These are orders that will automatically fill once your stock drops to a certain point.
In general, you don’t want to set a stop loss too close to your purchase price. Instead, come up with a standard, maximum loss that you are willing to suffer, like ten percent.
That way, minor movement in the market won’t trigger a stop loss, and you can ride a downtown without getting out of a stock, but if it enters free fall, you’re insulated from losing all of your money. Of course, you’ll need to do the same thing even if you’re shorting a stock to protect you against the share price rising.
Set Profit Goals
On the opposite side of the coin, make sure that you set a clear goal for yourself when you first invest in a stock. At what profit level are you trying to cash out? How long are you willing to wait?
For things like REITs, which pay dividends every month, it may make sense to hold on to them for as long as possible, as they will eventually pay for themselves. However, you should still pay attention to dividend payments and the financials of the company. If they start laying people off, selling property, or cutting the dividend, it’s a sign to sell sooner rather than later.
Choosing to invest in a car company, on the other hand, will be a little more volatile, so it makes sense to cash out once you hit your earnings goal of seven or eight percent. Don’t get sucked into thinking that the stock will inch upwards just a little bit more – take what you’ve made and move on.
Whatever you do, just don’t try to time the market’s peaks and valleys. It’s impossible to understand everything that makes a stock move, and there’s no way to predict exactly how far it will fall or high it will rise.
Look for Long-Term Patterns
In some cases, especially for longer-term investments, you need to look at the trendline month by month instead of daily or weekly. If, for instance, a bank you have invested in has steadily dropped in value over the course of two quarters or longer, you should consider selling.
Long term trends downward can happen for many reasons, from scandals in the news to simple poor business performance. If you invested early enough and the company has grown in value quite a bit, a stock could be trending downwards for months before you realize a loss. Catching a trend early lets you sell while you can still capture some of your profits.
Knowing When to Sell a Stock is an Art and a Science
Investing is all about minimizing risk while maximizing profits. Of course, that’s easier said than done, but the above tips can help you realize when to sell a stock and turn a tidy profit.
Want more information about investing in stocks? Check out our stock loan program 101 guide here!