Knowing when to sell and when to buy is often one of the most intimidating parts of learning how to invest in the stock market. While there are many different theories and strategies regarding when to buy and sell stocks, there are some hard and fast rules in terms of what is generally good practice.
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When Should You Sell a Stock?
The most famous adage when it comes to the stock market is to buy low and sell high. In general, it’s a good strategy to purchase stocks when they’re less expensive and to sell them when they become more expensive in order to turn a profit on your investment.
While this may sound like simple advice, in reality it can be difficult to predict which stocks will take off and which will experience only modest growth or even decline. One helpful determining factor is a company’s price-to-earnings or P/E ratio. If a company has a high P/E ratio, especially in relation to its 10-year average, this may indicate that the company’s stocks are overvalued and it’s a good time to sell.
Other things to keep in mind when considering selling stocks are if the stock has recently risen dramatically in price, or if the price has reached an unreasonable and unsustainable amount. In either of these scenarios, it’s often a good idea to sell your stocks and cash in on your investment before the price decreases.
Watch a Company’s Fundamentals
A company’s fundamentals, such as overall sales or debt, can give smart investors hints about how that company is doing. If sales start to fall, or if the company is taking on more and more debt, it may be a sign that the stock price is about to drop. In these instances, it’s usually a good time to sell your stock.
If You Have a Goal Price
Investors often invest in the stock market with a specific goal in mind. For instance, if you buy a stock at $10 a share, you might plan on selling when they reach a value of $20 a share. While it’s usually a good idea to stick to a goal, you should be careful not to become so attached to a specific goal that you lose sight of other market factors. If you suspect that the price of a share will continue to rise, it makes sense to continue to hold onto those stocks rather than selling.
When Prices Increase Sharply
If prices increase suddenly and dramatically, it might be a good time to sell. Stocks usually don’t continue rising forever, so it’s not always a good idea to hold out for the highest possible price. Instead, you should try to sell your stocks before the price begins to decline.
When You Were Wrong
Sometimes, investors make a mistake when purchasing a particular stock. A company may have failed to take off, and the price of a share may even have declined. It’s better to own up to your mistake and sell sooner rather than hold onto a bad stock out of stubbornness and suffer even greater losses.
When You Need the Money
If you find yourself in need of cash, you can always turn to your investments in the stock market. Whether you need the money for a financial emergency, to make a big purchase such as a house or a car, or even if you’re interested in investing your money elsewhere, you can always sell your stock in order to have more cash on hand.
When Should You Hold on to Stock
There are a variety of circumstances under which it’s not a good idea to sell your stocks. You may want to avoid selling too many stocks at once because of fees or taxes. In addition, you should hold onto stocks when you believe a company will continue to grow.
To Avoid Fees and Taxes
When you sell a lot of stocks at once, you may incur a variety of fees and taxes, including stockbroker fees. In particular, if you sell a stock after less than a year, any profits are taxed as ordinary income, which can incur a high tax penalty depending on your income level. If you sell stocks after a year, however, they are taxed using a capital gains tax with a maximum rate of 20%. In situations where a stock is seeing slow but steady growth and you don’t expect it to precipitously decline, it makes sense to hold onto the stock for at least a year before selling in order to avoid additional tax penalties.
To Take Advantage of Continued Growth
Holding onto stocks that have a much higher price per share than your initial investment can feel risky. Many investors are quick to sell as soon as they turn a moderate profit on their investment, or if they have incurred even a minor loss. In many cases, however, it makes sense to hold onto stocks in order to weather market fluctuations and benefit from long-term gains. While stocks may be volatile in the short term, in the long term investors have a much higher likelihood of turning a profit.
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