Know When To Sell A Stock
Selling a stock is very important part of the investment process. Here are the main aspects to consider in deciding whether to sell a stock.
When buying a stock, you perform a due diligence, using the steps implied in Eudividend Investing system. You investigate the past, current and possible future performance of a 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 the stock just because the whole market is in downturn. Majority of downturns are short-lived and in the most of cases you would sell it just before stock price starts to go up. Market fluctuates and you should let your stock to move together with it. You could even buy a bit more shares of the company to reduce the average cost of acquiring stock if you believe in the company’s bright future and the price is down due to the general market correction only.
Take into account the 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 the long term value of a company and on selling at the higher price than you bought it.
If one-off event is damaging the price of stock, be patient and keep stock until the company’s situation improves. If that event does not have the 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 a management team. It can be an indication of the possible trouble in the performance of a 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 the stock becomes over-priced. Regularly check your portfolio’s stocks for the price reasonableness, using the stock price estimate on a Stock Screen. If the price becomes high enough in relation to its peers and, consequently, a dividend becames 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 a company deteriorates essentially
- There are no future growth prospects
- It loses its market share to competitors
- Something unforeseen happens and it will have the permanent negative effect on the company performance.
If a company struggles fundamentally, its share price will not grow over longer term and the 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 the stagnant price records.
Your decision to sell in all cases should depend on your assessment whether the dividend of a stock is safe enough. You should investigate the stock data.
What you should be looking for? The following factors indicate that a 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 the 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 the 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 the higher than desired risk profile in a portfolio. If the aggregate group of troubled stocks are making your overall portfolio more risky than intended initially, you can decide to sell the stock and look for the healthier alternative.
When deciding to sell a stock, make sure you have better alternative in your Watchlist to replace the lost dividend income.
You can decide to sell a stock if its position in a portfolio becomes high. For example, if the 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 the 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 the stock data and always write down the reasons behind your decision. That increases the chances of becoming successful investor.
Learn from your mistakes made on the buy and sell decisions. Review regularly conclusions and develop the rules to avoid similar mistakes in the future.