Know When To Sell A Stock
Selling a stock is very important part of investment process. Here are the main aspects to consider when deciding whether to sell a stock.
When buying a stock, you perform a due diligence using the steps implied in Eudividend system. You investigate the past, current and possible future performance of company. Then you write down the reasons WHY you decided to buy that particular stock. If you consider selling a stock, check whether the reasons WHY you bought a stock are still in place. If so, do not sell it.
Do not sell a stock just because the whole market is in downturn. Majority of downturns are short-lived and in the most of cases you would sell just before stock price starts to go up. Markets fluctuate and you should let your stock to move together with a market.
You could even buy a bit more shares of company to reduce your average cost of acquiring stock if you believe in company’s bright future and the price is down due to general market correction only.
Take into account market cycle on the time of decision making, but do not attempt timing the market. No one is consistently successful on picking tops and bottoms. Instead, focus on long term value of company and on selling at higher price than you bought it.
If one-off event is damaging the price of stock, be patient and keep stock until company’s situation improves. If that event does not have prolonged effect, most probably a stock price restore in the future.
Do not increase exposure to that stock through buying more shares at lower price since it increases the weight of stock in portfolio and, consequently, the risk profile of your portfolio.
Pay special attention to unusual change in management team. It can be an indication of possible trouble in performance of company.
Stock gets over-priced
If you bought the right stock at the right time the only reason to sell – and every investor would like it – is when stock becomes over-priced. Regularly check your portfolio’s stocks for price reasonableness, using stock price estimate on Stock Screen. If the price becomes high enough in relation to its peers and, consequently, dividend lower, maybe it is better to use your money elsewhere and earn higher returns.
You should sell a stock in the following cases:
- The business of company deteriorates essentially
- There are no future growth prospects
- It loses market share to competitors
- Something unforeseen happens and it will have permanent negative effect on business.
If company struggles fundamentally, its share price will not grow over longer term and dividend growth is very unlikely.
On the other hand, even though both dividend growth and share price stalls but you believe that fundamentals are not damaged, assess whether you are happy with the current return provided by dividends. If dividend yield provides you with return you want, then you probably can keep the stock despite stagnant price records.
Your decision to sell in all cases should depend on your assessment whether a dividend of stock is safe enough. You should investigate stock data.
What you should look for? The following factors indicate that company is likely to cut its dividend.
- High dividend yield – higher than that of peers
- High payout ratio – higher than that of peers
- Cash flow per share is close to or lower than dividend per share
- Company has a high level of debt.
Individual investment portfolio perspective
Assess a decision to sell from your investment portfolio perspective.
The sell decision is influenced by the size of investment in whole portfolio. If only small percentage of portfolio is invested in a stock, an investor can be more patient with it. The higher is the amount invested, the more attention should be paid to that investment.
Check whether there are more stocks with higher than desired risk profile in a portfolio. If aggregate group of troubled stocks are making your overall portfolio more risky than intended initially, you can decide to sell a stock and look for healthier alternative.
When deciding to sell a stock, make sure you have better alternative in your Watchlist to replace lost dividend income.
You can decide to sell a stock if its position in portfolio becomes high. For example, if price goes up substantially.
If your stock is down 15% or more, take a close look, investigate and decide what could be expected in the future. It is emotionally difficult to take losses. However, it is very difficult to be right in all of your decisions. Even experienced professionals cannot achieve it. In order to limit losses from time to time you should take unpleasant decision. If you do not sell a broken stock, accumulating huge losses, it can reduce your confidence in investing and even discourage from investing.
So, have clear selling rules and adhere strictly to them. Never sell on emotion. Sell only after careful analysis of stock data and always write down the reasons behind your decision. This increases the chances of becoming successful investor.
Learn from your mistakes made on buy and sell decisions. Review regularly conclusions and develop rules to avoid similar mistakes in the future.