One of the common mistakes that investors make when it comes to the stock market is selling their favorite stock too soon. Based on studies, it shows that investors more likely sell stocks when it has profits and less likely to sell a stock when they got it at a loss.
Even if it might seem counterintuitive, it falls in line with the studies on how investors in the stock market make decisions. People are more likely to take small known profits instead of selling at a loss that confirms the mistake of the investor and closes the door on possible rebound.
There are some good reasons to sell at profit, but there is seldom a good reason for you to hold on to confirmed losing stock. A lot of investors have strong fear of turning paper loss to real loss. If you are wondering when to sell your favorite stock, others would counsel not to sell it. There are also some who will caution you that selling must be a deliberate process like buying.
Below are some of the things to consider when planning to sell your favorite stock:
- Stock Hits the Target Price
Lots of investors set a floor on the price of the stock. So, if it falls below a particular level, then sell. You may also set your preferred upper limit that triggers your sale.
- Fundamentals Start Failing
If the fundamentals of the company including cash flow, sales, and debt start showing signs of stress, it means that something has changed and it will affect the price of the stock negatively. Never wait for the market to panic on the decline in revenues or another crucial fundamental. You must be ready to unload the stock while you have a healthy profit.
- Eliminated or Cut Dividends
When businesses begin eliminating or cutting dividends, it’s time to consider selling the stock. The dividend cut of the company is serious and it shows financial problems that investors must pay attention to.
- Be Aware of Excessive Trading
While you often want to maximize your investment, never eat into your profits through running up a huge bill at your stockbroker in the commissions through frequent trading. Some smart trades will beat a mediocre one any day.
- Selling Strategies
Some selling strategies include thoughtful consideration of the events that are moving against your stock, which can cause the need to act.
If your stock becomes the focus of the media and gets attention, it might be time for you to look at taking profits. These attract inexperienced investors who bid up the prices to have the market collapse once hype dies. If you will not be careful, you may watch the price fall down easily right past your profits.
Make sure to look at some stocks that can give you a better opportunity with lesser risks than your holding. Just because you have good stock with nice profits, it does not mean you must not stop looking for better deals.