Various sources have numerous recommendations for buying stocks, with the most prevalent ones coming from stockbrokers, analysts, investment managers, and investment newsletters. But, there is very limited advice on when to sell your stock. If you need a quick guide on the best time for selling your stock, here are a few tips you can keep in mind.
Deterioration in Fundamentals
Together with tracking the stock price of a firm after a price target is established, it is important to monitor how the underlying business performs. One good reason for selling is once you notice a decline in business fundamentals. In a perfect word, the investor will realize deterioration in profit margins, sales, cash flow or other primary operating fundamentals prior to the decline of the stock price. Analysts who have more experience may read deeper into financial statements, including filing footnotes other investors might overlook.
Fraud is among the more serious flaws in fundamentals. Investors who managed to spot financial fraud early on from the likes of Tyco, Enron, and WorldCom saved significant sums as these firms’ share prices went downhill.
Your Price Target is Hit
During the initial purchase of a stock, more astute investors often establish their price target or they have a range as to when they will consider selling their stock. Every purchase of stock must include the analysis of the stock’s worth, with the current price at substantial discount to the estimated value. For example, it would be worthy goal to sell out of the stock once its price is doubled and it is an implication that the investor assumes that it has been undervalued by 50 percent.
Even seasoned investors might find it hard to reach one price target. A range is much more realistic instead just like option to sell the position off while it rises to help lock in the gains.
A Better Opportunity Arrives
Opportunity cost is one advantage that you can obtain through going with a good alternative. Prior to owning any stock, you need to compare this with potential gains you can obtain when you own another stock. When the alternative is much better, it will make sense to sell the existing position and purchase the other.
It is can be very hard to accurately identify opportunity cost but it can include putting an investment in a competitor when its growth prospects is equally compelling and trades at much lower valuation.
After a Merger
In general, the average takeover premium or the price for buying out a company ranges from 20% to 40%. If luck is with the investor enough for owning a stock that gets acquired for a substantial premium, selling it would be the most ideal course of action. Choosing to continue to own the stick even following a merger could have some merits, like when the combined companies’ competitive position has significantly improved.
But, mergers have somewhat lousy success track records. In addition, the deal may take several months before it gets completed. Thus, from the perspective of opportunity cost, it makes sense to look for an alternative opportunity for investment with a better upside potential.