Jasmine Birtles
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How to Know When to Sell a Stock (and When to Hold On!)
Ruby Layram
21st Oct 2024
Eventually, the time will come when its time to let go of certain areas of your portfolio. Investors might choose to sell stocks for various reasons including to free up some extra cash or to reinvest in a more profitable opportunity.
Selling your stocks can feel like a huge decision! What is the market turns and you miss out on future profits? Understanding when it’s the right time to sell can make this decision a lot easier.
In this article, we’ll look at the key reasons you might consider selling a stock and discuss scenarios where you may want to hold onto your investment instead. By the end, you’ll feel more empowered to make informed decisions that suit your unique financial situation.
8 Reasons to Sell a Stock
There are many reasons why you might find yourself hovering over the SELL button. Although it’s important not to get caught up on short-term dips, there are some occasions when selling might be your best option.
1. You Want to Rebalance Your Portfolio
As the market fluctuates, your portfolio can drift away from your intended investment strategy. If you’ve found that certain stocks have grown disproportionately in your portfolio, it may be time to sell some shares and rebalance.
For example, if tech stocks have grown by quite a lot and now make up a larger percentage of your portfolio than you intended, selling some shares can help you reduce risk and maintain a balanced approach.
You can find out more about rebalancing your portfolio in our guide on how to spring clean your investment portfolio.
2. The Company’s Outlook Has Changed
Keeping an eye on the companies you invest in is essential. Events such as leadership changes, regulatory issues, or the introduction of a new competitor can negatively impact a company’s outlook. If the future no longer seems bright, it may be worth selling!
For instance, if a company’s top executives leave, it might raise red flags about its future direction. Always be ready to reassess your investments based on the latest news.
3. You Want to Pocket Your Profits
We all love a good profit, don’t we? If a stock has performed well and reached a price that aligns with your financial goals, it might be time to take those gains and leave. Stocks don’t stay at their peak prices forever, selling now could secure your profits.
You can always reinvest later if you believe in the company’s long-term potential.
4. You Need Extra Cash for a Big Life Event
One of the biggest reasons that people start investing in the first place is to save for big life expenses such as a buying a house, funding a wedding, or paying for your child to go to university.
What’s the point of spending all that time investing if you can’t enjoy the fruits of your labour?
If you need cash a significant life event and have stocks that you can liquidate, selling could be the answer. Just make sure to evaluate how this sale will affect your long-term financial goals.
5. The Stock Has Failed to Perform as Expected
If you bought a stock based on certain projections and it hasn’t lived up to those expectations, it might be time to reconsider.
For example, if you invested in a company expecting it to grow by 20% annually and it consistently underperforms, consider cutting your losses and reallocating that capital to a more promising opportunity.
6. You Want to Sell in Response to Bad News
Negative news can often lead to panic-selling among investors, but it’s essential to remain calm and avoid fomo. If significant events occur, such as a major lawsuit, it could indicate deeper issues within the company.
Take a look at the situation carefully and, if you believe the problem is serious and will impact the company’s future, selling could be a prudent choice.
7. You Want to Pay Off Debt
Another good reason to consider letting go of a stock is to pay off debt. After all, the interest on that debt could outweigh any gains you make from holding onto the stock.
If selling a stock will free you from the chains of debt, it might be worth considering.
8. The Stock Has Met Your Target Price
Setting target prices is a smart strategy to help you stay disciplined with your investments. If your stock has hit the price you aimed for when you bought it, don’t hesitate to cash out!
This strategy helps you take the emotion out of selling and ensures you’re aligning your actions with your investment goals.
When You Shouldn’t Sell a Stock
While there are plenty of valid reasons to sell, it might not always be the best plan. Here are some scenarios where you might want to consider holding on to your stocks.
The price has taken a temporary dip
Market fluctuations are a normal part of investing. If you panic-sell every time a stock takes a dip, you could miss out on potential rebounds. Instead, take a moment to assess the situation.
Is the drop due to a broader market trend, or is it a result of a fundamental issue with the company? If it’s the former, it might be wise to hold on for the long term.
Other people are telling you to sell
Peer pressure can be a dangerous game in investing. Just because friends or family are suggesting you sell doesn’t mean it’s the right decision for you. Always conduct your own research and make investment choices based on your unique goals and risk tolerance.
To fund unneeded expenses
Selling a stock to cover expenses that aren’t essential can be a slippery slope. While it may seem tempting to liquidate investments for a fancy vacation or a new gadget, think about the long-term implications.
Are you sacrificing future gains for short-term pleasures?
It’s worth considering whether you can find alternative ways to fund those expenses without touching your investments. For example, you could start a side hustle!
Knowing when to sell a stock is just as important as knowing when to buy. By understanding the key reasons to sell, being aware of red flags, and avoiding emotional decision-making, you can make informed choices that align with your financial goals.
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
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