Most Financial books and articles mostly emphasis how or when to buy a stock, but they do not cover when you should sell your stocks. However, selling a stock, is just as important as buying a stock.
When a stock or fund price is increasing in the market, the last thing in our mind is to sell it. Generally, most people would want how much higher their stock will go. But it is not good to get too greedy. Of course, this is easier said than done. Hence, in this post, I will go through when you should sell your stocks.
If you are wondering how long you should hold a stock, maybe you can take a look at one of the rules that Warren Buffet lives by:
“Our favorite holding period is forever.”
Warren Buffet
According to Warren Buffet, you shouldn’t hold a stock for even 10 minutes if you don’t want to hold a stock for at least 10 years. Hence, there are only 4 reasons why you should sell a stock:
- You need the cash urgently
- When a Stock is overvalued
- You bought the wrong stock
- You achieved your goal
1. You need the cash urgently
If you are a long term investor like I am, you should spend some time to analyse the situation before selling your stocks. After all, stocks can be considered an asset to investors. If you really need the cash for an emergency, such as medical expenses and financial troubles (such as losing your job).
However, if you know you need the money in the next 2 – 3 years, you can consider selling your stocks when the price is good. This money can be used for major life events, like purchasing a house, retirement or paying for college.
2. When a stock is overvalued
One way to determine if a stock is overvalued is to look at its P/E Ratio, also known as the Price to Earnings Ratio. When the P/E ratio is significantly higher than the average P/E ratio in the last 5 – 10 years, it might be a sign that the stock is getting overvalued.
It is important to compare the P/E Ratio of a Company to its competitors. An example of this is when a company’s stock is 50 times its earnings while its competitors P/E Ratio is 10. This might imply that the stock is overvalued.
Another method to determine if a stock is overvalued, is to check the ‘PEG’ Ratio. This is a Company’s Price to Earnings Ratio divided by the growth rate of the earnings. A P/E Ratio of a Company can make the company look like its worth buying without factoring in the growth rate.
The lower the PEG ratio, the more the stock may be undervalued given its earnings performance. Hence, a PEG Ratio can indicate if a stock is undervalued but it can vary depending on the industry.
3. You bought the wrong stock
Let’s say you bought a stock because everyone else is buying it. And right after you have bought the stock, the price keeps going down. So, what should you do? Should you straight away sell the stock by looking at the graph? Wrong.
Even though you bought the stock for the wrong reasons, you shouldn’t sell a stock just because it is going down in the market. You should research further on the stock, and carry out your own analysis. Try taking a look at the company’s financials, such as the Balance Sheet, Income Statement and Cash Flow Statement. You can also analyse a company for its strategy and management. Click here for more tips on how to analyse a stock in order to pick the best stocks. After carrying out your analysis, if you realise the stock is still a bad stock, then you should sell your stocks.
Additionally, don’t overreact and sell your stocks if a business is not doing well in the short term. However, if a company is losing its market share to competitors, then that could be a sign of long-term weakness which is a reason to sell away your stock.
4. You achieved your goal
This should be self-explanatory. If you have set a goal or a target for a stock and you have reached the goal, then you can consider selling your investments. But before you do that, you might want to re-evaluate your company. If the company still has potential and is undervalued at the point of time you have reached your goal, it might be wiser to wait a little longer before selling your stock.
Nevertheless, if you have investment the money for a long-term goal and you have achieved it, then you should sell your stock and never look back.
Conclusion
I hope this article gives you an idea of when you should consider selling your investments. Remember not to let your emotions cloud your judgement on when you should sell a stock. A sale in stocks can be considered good when it results in profits and has a good reasoning behind it.
