There are correct and incorrect reasons to sell a stock. While it's by and large a bad thought to sell a stock simply because its cost increased or decreased, other situations perfectly justify placing ane or more sell orders.
Permit's delve into several good reasons for selling a stock, when to sell stock for a profit or loss, and which circumstances do not justify selling a stock.
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Reasons to sell a stock
Hither's a rundown of v scenarios that can justify selling a stock:
1. Your investment thesis has changed.
The reasons why you lot bought a stock may no longer utilise. Examine why you bought a stock in the starting time place and ask yourself if those reasons are still valid. You should have a reason -- or an investment thesis -- for each of your stock investments other than just wanting to brand money.
If something fundamental about the company or its stock changes, that tin can be a good reason to sell. For example:
- The company'due south market place share is falling, mayhap considering a competitor is offering a superior production for a lower price.
- Sales growth has noticeably slowed.
- The company'southward management has inverse, and the new managers are making reckless decisions such as assuming likewise much debt.
Of form, this listing isn't exhaustive. If something substantially changes that contradicts your investment thesis, that'southward one of the all-time reasons to sell.
ii. The visitor is existence acquired.
Another potentially good reason to sell is if a company announces it has agreed to be acquired. After an conquering is announced, the stock toll of the company being acquired typically rises to a level close to the agreed-upon buy price. Since further upside potential tin exist quite limited, information technology may be wise to lock in your gains shortly after the conquering annunciation.
Specifically, the way the company is being acquired affects whether selling your stock is the right determination. A company can be acquired in cash, stock, or a combination of the two:
- For all-cash acquisitions, the stock price typically quickly gravitates toward the conquering cost. But if the deal is not completed, then the company's share price could come crashing dorsum down. It's rarely worth property on to your shares long after the announcement of an all-cash acquisition.
- For stock or greenbacks-and-stock deals, your decision to concur or sell should exist based on whether you lot have any desire to be a shareholder in the acquiring company. For instance,
(NYSE:WORK) recently agreed to exist acquired past
(NYSE:CRM) in a greenbacks-and-stock deal.
Slack shareholders who don't desire to go Salesforce investors would exist well brash to cash out.
3. You need the money or soon will.
It's generally a best practice non to invest in the stock market with any coin you await to need within the next few years. Only if you need the money, that's certainly a valid reason to sell.
Perhaps you desire to purchase a house and sell some stock to encompass the downward payment. Or yous may have children who plan to nourish college in a few years, and you want to convert your stock holdings into more secure investments such as certificates of eolith (CDs).
4. Yous need to rebalance your portfolio.
Your investment portfolio tin become unbalanced in one or more ways. That is why periodically rebalancing your portfolio -- which may involve selling some stock -- is necessary for most investors. These are 2 of the most common circumstances preceding a stock sale:
Owning a high-performing stock:
If you own shares that have significantly increased in price, your position in the visitor may represent a large portion of the value of your portfolio. While this is a skilful problem to have, you may not be comfortable with having so much of your money invested in a single company and cull to sell office of your stock.
Seeking to reduce your stock exposure:
As you lot get closer to retirement, it'south smart to gradually reduce your portfolio's stock holdings in favor of safer investments such as bonds. One pop rule of thumb is to decrease your age from 110 to make up one's mind the percentage of your portfolio that should be invested in stocks. If your portfolio seems as well stock-heavy, then selling some stock to reallocate your resources tin exist a good decision.
5. You identify opportunities to better invest your money elsewhere.
In a perfect world, yous'd always have spare cash to invest for every time you identify an attractive investment opportunity. Since that'south probably not the case, you may decide to sell stock to invest the cash differently.
Permit's say you observe an incredible buying opportunity for one of your favorite stocks and make up one's mind you want x% of your portfolio to exist allocated to this investment. If you don't happen to accept 10% of your portfolio sitting in cash, you may decide to sell some shares of another stock or exchange-traded fund (ETF) yous own to gratis up some capital. There's probable nada wrong with the other stock or ETF, only recognizing an first-class long-term opportunity elsewhere can be a valid reason to sell.
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When to sell stocks for turn a profit
Any of the above are good reasons to sell a stock for a turn a profit. Having earned a profit from an investment tin further justify selling the stock to pay for a major purchase, your living expenses in retirement, or as role of your portfolio allocation strategy.
Merely don't sell a stock for profit just considering the cost increased. Doing that would exist falling into the trap of believing that it's a skilful idea to "take some money off the tabular array" if a stock gains value.
When to sell stocks at a loss
Similarly, it'south usually a bad thought to sell a stock only because its cost decreased. At the same time, though, sometimes yous simply have to cut your losses on a stock position. It's important to not let a driblet in a stock'southward cost
you lot from selling.
As legendary investor Warren Buffett says, "The nearly of import matter to exercise if yous discover yourself in a hole is to stop earthworks." If your original reason for buying a stock no longer applies, or if you were just plain incorrect nigh the visitor, then selling at a loss rather than continuing to concord may be your best option.
When not to sell a stock
It's important to clearly know when not to sell a stock. Here's a list of some of the situations in which information technology's inadvisable to sell your shares:
Don't sell a stock just considering its price increased.
Winning stocks increase in toll for a reason, and they also tend to keep winning.
Don't sell a stock just because its price decreased.
Every investor wants to purchase low and sell high. Selling a stock only because its price fell is literally doing the exact opposite.
Don't sell stock just to salvage money on taxes.
While a tax strategy known every bit tax loss harvesting tin can reduce your taxable upper-case letter gains by incurring losses on unprofitable stock positions, it's nonetheless a bad idea to sell stocks just to lower your taxes. Revenue enhancement loss harvesting tin exist a smart tax-saving strategy, but only if you are choosing to sell a losing stock for other valid reasons.
Related investing topics
The Motley Fool sells stock regularly, too
While The Motley Fool ever approaches investing with a long-term perspective, that doesn't mean we merely suggest stocks to buy. We regularly give "sell" recommendations to our members and oftentimes for one of the reasons described to a higher place. At that place can exist several valid reasons to sell a stock, and many long-term-focused investors often take reasons to offload parts of their holdings.
Matthew Frankel, CFP® has no position in whatever of the stocks mentioned. The Motley Fool has positions in and recommends Salesforce, Inc. The Motley Fool has a disclosure policy.