There are several good and bad reasons to sell a stock. While it’s typically a bad idea to sell a stock just because its price rose or fell, other factors provide perfect justification for placing one or more sales orders.
Let’s look at several excellent reasons to sell a stock, when to sell for a profit or loss, and which situations don’t justify selling.
Reasons to sell
Here’s a rundown of five potential reasons to sell a stock.:
1. Your investment reasons have changed.
You may find that your reasons for purchasing a stock no longer apply. Examine why you bought a stock originally and ask whether those reasons are still valid. You should have an investment thesis (i.e. a reason) for each of your stock purchases, other than just wanting to profit.
If there are any significant changes to the company or its stock, that would be a solid reason to sell. For example:
- The company’s market share is falling, likely because a competitor offers a higher quality product for less money.
- Sales have slowed considerably.
- The company’s leadership has changed, and the new heads are making poor decisions – one example is taking on too much debt.
This list is by no means comprehensive. However, if something occurs that directly goes against your initial investment idea, it may be time to sell.
2. The company will be acquired.
A company may announce it has entered into a deal to be acquired, which might give you a good reason to sell. The stock price of the purchased firm typically rises to a level near or above the agreed-upon purchase price following an acquisition announcement. Because there are few other potential upsides, securing your profits as soon as possible may be prudent.
How another company is acquiring the business will affect your decisions when selling your stock. The acquisition can involve cash, stock, or a mix of both:
- For exclusively cash deals, the stock price usually goes up to meet the acquisition price. But if the deal falls through, the company’s share prices could drop sharply. Most investors sell their shares not long after an announcement like this.
- For stock or cash-and-stock transactions, you should consider whether you want to be a part owner of the acquiring company. For example, Salesforce (NYSE:CRM) recently acquired Slack Technologies (NYSE:WORK) in a cash-and-stock deal. Shareholders who don’t wish to become Salesforce investors should consider cashing out.
3. You need the money.
It’s usually preferable not to put money into stocks with any sum you think you might need in the next few years. But, on the other hand, if you need the cash, that’s a justifiable reason to sell.
Maybe you want to buy a house, and selling some shares would cover the down payment. Or your kids could be going off to college in a few years, and perhaps you’d rather convert stock holdings into safer investments like certificates of deposit (CDs).
4. Your portfolio needs balancing.
You may need to sell some of your stocks and rebalance your portfolio for several reasons. Furthermore, rebalancing ensures that your investment stays on track. The following are two common scenarios where selling stock might be necessary:
- Owning a high-performing stock
If the shares you own have increased significantly in price, the value of your position in that company may now make up a large part of your portfolio. Although this is good news, you might not be comfortable having so much money invested in one company and want to sell some of your stock.
- Seeking to reduce your stock exposure
As you get closer to retirement, it is wise to begin investing in safer options such as bonds. A popular rule of thumb is subtracting your age from 110 to determine the percentage of stocks you should have in your portfolio. If it seems that there are too many stocks, selling some and reallocating resources can be a good idea.
5. There are better opportunities to invest your money elsewhere.
In an ideal world, you’d have available cash to invest in every instance that you detect a promising investment opportunity. However, since it’s unlikely that this will happen, you may decide to sell stock to utilize the money differently.
For example, you find a fantastic buying opportunity for a stock you like and want 10% of your portfolio invested in it. However, if you don’t have 10% worth of spare cash right now, you might sell shares of another stock or ETF you own to get the necessary capital. There’s likely nothing wrong with what you’re selling, but if there’s a chance to invest elsewhere long-term, that could be a good enough reason to go through with the sale.
When to sell stocks for profit
The above are excellent reasons to sell a stock for a profit. Making a profit from an investment might help you justify selling it to pay for a major purchase, your retirement living expenses, or as part of your portfolio allocation plan.
It’s not worth selling a stock just because its price has increased. If a stock rises in value, you shouldn’t sell it for profit. Doing so is to fall into the trap of believing that if a stock increases in value, it’s a good idea to “take some money off the table.”
When to sell stocks at a loss
It’s also typically a poor idea to sell a stock because its price has fallen. On the other hand, you sometimes just have to cut your losses on a stock position due to market volatility. Therefore, it’s critical to not to let a stock’s price fall prevent you from selling it.
Warren Buffett once said, “The most important thing to do if you find yourself in a hole is to stop digging.” If your original motivation for purchasing a stock no longer applies, or if you were incorrect about the firm, then selling at a loss rather than continuing to hold may be your best option.
When to NOT sell a stock
It’s critical to know when not to sell a stock. Here are several of the situations in which it’s unwise to sell your holdings:
- Don’t sell just because its price rose. Stocks that are doing well tend to keep winning because there is usually a reason for their initial success.
- Don’t sell just because its price dropped. Buying low and selling high is every investor’s dream. Selling a stock simply because its price takes a dip is the polar opposite of what you should be doing.
- Don’t sell just to save on taxes. Tax loss harvesting involves selling stocks that have lost money to lower your taxable capital gains. However, it’s important to remember that you should only sell losing stocks for other valid reasons and not simply to reduce your taxes.