Selling shares
Making money with stocks comes down to 2 important decisions: Buying and selling at the right time. You have to choose both moments correctly to make a profit. There are only three good reasons to sell:
- Buying the stock was a wrong choice in the first place
- Prices have increased dramatically
- The stock has reached a strange and unsustainable price
Read on to learn more about these three reasons to sell. But first, let’s talk about some common mistakes to avoid when buying and selling.
Buy smart
The return on any investment is first determined by the purchase price. It is also said that profits or losses are made at the time of purchase. The buyer only knows this until the investment is sold.
While buying at the right time ultimately determines profit, this profit is only guaranteed by selling at the right time. If you do not sell at the right time, the benefits of buying at the right time disappear.
Selling is hard
Many of us have difficulty selling stocks, this is caused by the greedy traits that lurk within all of us.
Here is a scenario that may be a bit too familiar: You buy shares for $25 each with the plan to sell them at $30. The share reaches $30 and you decide to wait a bit longer to sell. This seems to pay off and the share reaches $32, unfortunately greed takes over your mind and you want the share to rise even more before you sell it. Suddenly the price drops to $29 so you tell yourself to wait until the share reaches $30. This does not happen. Finally you give in to frustration and sell at a loss for $23 each.
Greed and emotion have taken over common sense. You have treated the stock market like a gambling machine and lost. The loss was €2 per share, which could have been a profit of €7 per share. These losses are best forgotten quickly, what it comes down to is the investor’s reasoning for selling or not.
To overcome emotion in the future, use limit orders that automatically sell when the stock reaches your target. You don’t even have to watch the stock. You will automatically receive a notification when your sell order is placed. Learn more about different orders
Never try to time the market
Selling at the right time does not require precise market timing. Only a small group of investors know how to buy stocks at the absolute bottom and sell at the top.
Even Warren Buffet can’t do this. He and other legendary investors focus on buying at a price and selling at a higher price. Which brings us to the three reasons to sell.
When Buying Was a Mistake
You probably did some research before buying the stock.
However, you may later discover that you have made an analytical error, and such an error can fundamentally affect your trade as a suitable investment.
Sell that stock, even if it means a loss.
The key to successful investing is to trust your data and your analysis, rather than the fluctuating emotions of the market. If for some reason this analysis is wrong, sell the stock and move on to other investments.
Of course, the stock price can also rise after you sell your stock, which can make you doubt yourself. On the other hand, the loss you suffered could be the smartest investment you ever made.
Of course, not all analytical errors are created equal. If a company has met short-term profit expectations and prices are falling, don’t oversell if the company is still reliable. If you see a company losing market share to its competitors, this could be a sign of long-term weakness and you should seriously consider selling.
When stock prices rise dramatically
It is entirely possible that a stock you just bought will skyrocket in a short period of time. The best investors are modest. Don’t take the sudden rise as confirmation that you are smarter than the market. Sell the stock.
A cheap stock can become an expensive stock for a variety of reasons, including speculation by others. Take your profit and move on. If the stock suddenly drops, consider buying it again. If the stock rises again, you will take another nice profit.
If you own a stock that has been falling for a long time, try to sell it on a so-called “dead cat bounce”. These are temporary, often unexpected moments of increase in the price of the stock. This limits any potential loss.
Sale for appreciation
This is a difficult decision, part art, part science.
The value of any stock ultimately comes down to the present value of the company’s future cash flows. Any valuation of the stock is not entirely accurate, because the future is uncertain. This is why investors consider the margin of safety to be very important.
A good rule of thumb is to sell when the company is significantly valued higher than its competitors. Of course, there are exceptions. For example, when ING shares are trading at 15x EPS and ABN is trading at 13x EPS, this should not be a reason to sell ING shares as ING has a larger market share.
Another rule of thumb is to sell when a company’s price-earnings ratio (current price divided by earnings per share) is significantly higher than the average ratio over the past 5 or 10 years.
When a company’s revenue declines, it’s usually a sign of declining demand. First, examine the annual numbers to understand the bigger picture. But don’t rely solely on these numbers. Look at the quarterly numbers. The annual revenue of a major oil and gas company may be impressive, but what if energy prices have fallen over the past few months?
Furthermore, when a company cuts costs, it often means that things are not going very well for the company. The biggest indicator is when there is a restructuring. The good news for you is that cuts are often positively perceived by the stock market, which often leads to price increases. So this should not be seen as a time to buy more shares, but rather as a time to start selling to prevent a subsequent decline.
Selling for the financial resources
This may not seem like a “good” reason to sell from an analytical perspective, but it is an important consideration for some. Stocks are assets, and people may need to cash out their assets.
Whether the money is used for a new business, college tuition, or a new home, the decision depends on your personal financial situation, not the fundamentals of the stock.
The Bottom Line
Any sale that results in a profit is a good sale. This is especially true if the reason behind it is correct. If a sale results in a loss while it was clear why this happened, this can also be seen as a good sale. Selling is a bad decision if it is done based on emotion, instead of data and analysis.
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