It’s a dilemma every investor faces: when is the perfect time to sell a stock?
If your stock has been going up, selling now could lock in your profits, but it could also mean that you lose out on even further gains if your stock continues to climb. Alternatively, if your stock is performing poorly, you will have to decide whether to sell and cut your losses or to hold on and wait for a rebound. While no selling strategy is foolproof, below are five tips to help you decide when to sell.
Keep Track of Fundamentals
If you’re investing in any company, you should at least have a basic grasp of how to read its financial statements. That’s where you will find out whether it is truly doing well. Get familiar with a stock’s profit margin, cash flow, and sales. The dot-com bubble provides a stark reminder of why fundamentals matter.
Before that bubble bursting, many financial commentators overlooked the fact that a lot of tech companies were failing to produce any profits, with the Wall Street Journal infamously arguing that the profit had become a “quaint idea.” As the world soon found out, even in tech, profits and fundamentals still mattered.
Watch Out for Threats
Fundamentals are important, but a disruptive threat can blindside even the most solid-looking company. Kodak is a prime example of a company whose fundamentals were strong in the 70s and 80s, but which failed to take advantage of the shift to digital cameras. In fact, Kodak even invented the first digital camera in 1975 but decided against marketing to protect what was then the staple of its business: film.
Take Advantage of Acquisitions
If you’re lucky enough to be holding a stock that is the subject of an acquisition, then you could have landed on a rare selling opportunity. Public companies that get acquired by a larger company typically see a rise of 15 to 20 percent. On the other hand, the company doing the acquiring will see its stock fall. Even rumors of an acquisition can drive stocks up, so it’s important to act fast to lock in that premium.
Set a Price Target
Setting a price target allows you to take advantage of gains without falling victim to your emotions. Many investors hesitate about selling because they worry about missing out on further gains. By making a sale automatic at a certain price, you remove the possibility of second guessing yourself. You can also do the reverse and sell your stock once it falls a certain amount, which helps you to minimize your losses.
Beware of Hype
The media hype surrounding a particular stock can be your best friend and your worst enemy. A hyped up stock can present a great selling opportunity, but only so long as you get out in time. Otherwise, you could face a massive loss. While there are plenty of examples of overhyped stocks, perhaps one of the most dramatic was that of Theglobe.com.
Thanks to the media hype, the company had the most successful IPO in history in 1998 — rising from $9 a share to $97 on its first day of trading. Within two years, however, the share had collapsed to less than 10 cents thanks to the inability of the company to actually turn a profit.
There’s never any guarantee of when is the “right” time to sell a stock. However, if you pay attention to a stock’s fundamental, stay on top of the news, and don’t get carried away by emotions, you can develop a selling strategy that will maximize profits and minimize losses.