When do you decide to SELL a stock?

We all know that buying a stock is easier than selling a stock - not talking about short selling here. We can choose to buy anytime we want and anything we want - Stocks, CFDs, options, futures, bonds etc. However its the art of selling that requires more skill and finesse. Selling is an art that takes experienced traders/investors years to hone their skill.

Selling too soon and you might miss the upside that comes along with it later and selling at a loss makes you seem like a loser admitting defeat. How often have we held on to shares that went below our stop loss and yet we would be too stubborn to sell thinking that the price will go up again one day/month/year/decade/century. Humans are engineered in a way to block out losses and too stubborn to admit defeat - this happens more to men than women as men tend to have bigger egos and testosterone levels. Its like boxers admitting to a defeat before the real fight started hence I would say men are more emotional when it comes to trading/investing. I wouldn't be surprised if all of you reading this are sitting on some paper losses more than paper gains. Time to reconsider, don't you think? The capital (minus the realised losses) can be put to greater use if you choose your next stock carefully.

I have experienced this dilemma like all investors do - selling only to see it rise higher and faster than you could ever imagined. Hindsight is a bitch! Anyway when do we sell?

Valuation: Price rises above fair value

Valuation, like beauty, lies in the eye of the beholder. Value investors purchase shares they believe are undervalued. If you have purchased a stock, and the share price has subsequently risen above what you believe is fair value, it might be time to sell. As the margin of safety becomes lower, it might be time to consider taking some profits and consider another buying opportunity elsewhere. Alternatively, you can also use a trailing stop loss to ride up the price surge if you still believe that the price will increase further. Remember to look for bubbly/frothy P/E ratios and compare against the industry peers and ensure that your stock is not in bubble territory.

Company Prospects have changed

 

Company prospects change all the time, and for a number of reasons - These could be internal, such as a change in CEO or adverse news. For example, many investors were worried about the impact Steve Jobs's death would have on Apple Inc. They could also be external, such as a threat from a new competitor, or a change in outlook for the industry in which the company operates. If the prospects have changed for one of your holdings, it might be time to re-evaluate. Some companies can also change for the better and as an investor, your job is to evaluate whatever news/changes and weigh the risk and reward accordingly. Again, we can use Apple Inc as an example where during the 90's, the company was going nowhere until the MP3 and iPhone were created and now the company is considered the epitome of human innovation.

Death Cross

If you have a little knowledge on technical analysis, you will know a death cross when you see one. It just means that the shorter term moving average crosses below the longer term moving average. For me, it would be the 50MA crosses below the 200MA on HIGH volume. Some prefer the 50MA below 100MA. Unusually high volume raises a red flag when a death cross appears and it would be prudent to sell before considering buying at a lower price in future. 

 

Better Opportunities

Be flexible enough to sell and put the capital into better quality stocks if the price is right and profit from it. I have a stock which I held for close to a year and right now my returns for that particular stock is..........2%! This is a classic case of not maximising returns and I am looking to liquidate it and put my capital to better use. The rest of my holdings are moving along nicely and hence I wont be selling them anytime soon!

 

Conclusion

 Lastly, selling is really a personal preference and a tiny profit is better than a loss. Freezing up your capital for fear of realising paper losses is not advisable and if your stock has fallen 50% or more, chance are - it will take a HUGE/IMPOSSIBLE task to recoup back the initial outlay - refer to table. The markets are always right and don't be too stubborn! Nobody will care about your money more than you do and have fun selling!