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Making money on the stock market involves two decisions: when to buy and when to sell the stock. Sell too early and you risk leaving gains on the table. Sell too late and your profits could evaporate. Savvy investors have sound reasons for deciding when to sell a stock.
Key Takeaways
- Deciding to sell can be trickier than deciding to buy.
- A combination of intrinsic and extrinsic factors can trigger a stock sale.
- Emotion and human psychology can cloud decision-making when investing in the stock market.
- It can be best to set a target price for selling and stick to it.
1. Get Rid of Your Mistakes
Chasing hot stocks is one of the most common mistakes. Investors have been known to buy stock because they’ve watched the shares rise steadily for weeks or months and they want to jump in on the action. The problem is that they may be jumping in just as other investors are bailing out.
You’ll soon realize your mistake if you do this. Your best move is to dump the stock even if it means taking a loss on the trade.
2. Don’t Hesitate to Lock in Gains
Do some research to determine why it’s happening if you own a stock that’s performing well. The gains may be justified by the company’s underlying fundamentals and real performance or they could be a knee-jerk response to a takeover rumor or a short squeeze.
Important
A short squeeze effectively squeezes out short sellers when the price of a stock rises significantly and they want to close their positions.
Consider selling all or some of your shares if there’s no good reason for the stock to be trading higher. You can put in a stop order to sell the remainder of the shares if it trades below a specified price.
3. Sell Your Failures ASAP
It’s not uncommon for a stock to drop steeply but then climb slowly back. Don’t wait and hope if you’re hanging onto a loser and it gets close to your original entry price. Sell it now. You’re better off reinvesting the money in a more favorable opportunity.
4. Set a Target Price and Stick to It
Professional stock traders set upside and downside targets based on information and they buy and sell stocks based on that information.
Technical analysts watch the price and volume trends of individual stocks to identify patterns that indicate that a stock is likely to move higher or lower in the near term. They buy or sell shares based on these indications.
Fundamental analysts examine a company’s financial reports and its competitive environment to identify stocks that are undervalued or overvalued by the markets. They buy those stocks and then sell them when they reach their fair value.
These are very different approaches but the result is the same: They’ve set a fair price for buying a stock and a fair price for selling it and they stick to it.
5. Be Ready to React to Bad News
Market reaction to negative news from a company such as an earnings miss or lowered forward guidance tends to be swift and unequivocal not only for that particular stock but for the entire sector. The investor must decide whether the deterioration is temporary or long-term.
Bad news can hit an entire sector at times or the whole economy. The first victims will be the stocks of companies that have a heavy debt burden or a weak financial position. Be ready to move your money.
6. Cash in to Improve Your Life
There’s only one good reason for spending all this time and effort investing in the stock market. Investors want to make money to create better lives for themselves and their families. Younger investors might sell to make a down payment on a house or buy a car. Parents may sell to fund a child’s education. Older Investors might sell stocks to invest in something safer in preparation for retirement.
These are all good reasons for selling stock.
Should I Sell or Buy More to Average Down if the Price of a Stock Plunges?
It depends. If a stock price plunges because of a significant and long-term change in the company’s outlook, that’s a good reason to sell.
Virtually all stocks, even the bluest of the blue chips, experience temporary setbacks and then move back upwards. Averaging down in such cases is a strategy to consider.
Can Traders Sell a Stock on the Same Day They Bought It?
This is commonly known as day trading. It can result in substantial losses and is best left to experienced traders who have enough capital to absorb losses.
How Long Does It Take to Receive the Proceeds From a Stock Sale?
It takes one business day to receive the proceeds of a stock sale in most cases. This is known as the T+1 settlement period. It was T+2 or two days until the Securities and Exchange Commission shortened the period by a day effective May 28, 2024.
The Bottom Line
Knowing when to sell a stock is as important as knowing when to buy it. Do some research in advance. Set a target price for both buying and selling the stock and stick to it.
Disclosure: Investopedia does not provide investment advice. Investors should consider their risk tolerance and investment objectives before making investment decisions.
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