A few years ago, you bought a stock on a whim. Perhaps it has been doing well for a while, or maybe it was yo-yoing. You’re just too sick to look at the stock that you think it’s time to sell.
There are a few things you should keep in mind before you pull the trigger on the sale order. Run down the 6 things on this checklist to see if you really should sell those stock shares or consider keeping them on for a while longer. Read on to discover the 6 questions you need to ask yourself before selling.
6 Questions You Need to Ask Yourself Before Selling Your Stocks
Much is required to buy stocks; investors appear to think even less about how to sell them. That’s a mistake, as the sale is when money is made. Doing it correctly can be essential to winning your income — or cutting your losses in other situations. So, here are the 6 questions you need to ask yourself before selling your stocks:
1. Did you Lose 10% of Your Investment?
Many financial advisors recommend dropping a stock if it declines by 10%, but the decision must eventually be focused on your risk tolerance. Before buying stock shares, you should decide how much you want the stock to rise and how much you are willing to risk the investment. If your target is to raise the stock by 20 percent, you can sell it if it exceeds that amount. Selling your shares if they reach the loss mark of 10 percent will prevent you from staying on bad stocks that could continue to fall.
2. Have Your Reasons Changed?
Typically, you purchase a stock because it’s inexpensive, because it has traction, whether the underlying business provides excellent goods or services (think Apple) or is about to come out with a new product or service, has the edge over its rivals or a combination of all these factors. You should have a justification for why you buy stock shares in a business. You should also be assured that, for a particular reason, the share price would rise above the one you paid. If that doesn’t work out if your logic doesn’t materialize, or the story changes, you should consider selling the stocks.
3. Do You Need to Rebalance Your Portfolio?
If you have a well-diversified portfolio, you eventually have some market segments doing a little better than others. Most financial experts recommend that you review your portfolio at least once a year and rebalance your assets to ensure you have the correct asset mix based on your overall financial strategy. Have small-cap stocks been going through a fantastic year? Every year, rebalance your portfolio by selling the winners and purchasing more inventories that didn’t do as well. It will help ensure that you adhere to the simple investment law of low buying and high selling.
4. Have You Considered the Tax Consequences?
If you consider selling shares that you keep outside of a tax-protected retirement account, taxes should be an essential factor in your decision. If the savings are within a 401k or similar tax-protected retirement account, so this is not a concern unless you withdraw retirement funds. But do not discount sales immediately, since you have to pay taxes. You don’t have to pay any loss taxes, you know, and you can apply taxes to benefit-taking requirements. For example, if you want to receive a 20% return on your stock purchase, you should consider an after-tax return rate. With a 15% tax rate on capital gains, you can sell when your shares rise by 23%, which will earn you a 20% return on your investment plus 3%, 15% of your capital gain income.
5. Do Market Data Give You Reasons to Sell?
Have you analyzed market data about the companies you own stock shares in? Have you learned anything interesting about the quarterly call the firm conducted for experienced stock analysts? These podcasts can be listened to live on the internet via sites such as Yahoo Finance and others, and they provide a vast wealth of information about the business, where it is going, and how the stock should be doing in the near future. Too many individual investors do not profit from these conference calls, but they offer a unique perspective and knowledge that many other investors do not have.
6. Have You Considered Transaction Costs?
Transaction costs are a major factor you need to remember when you sell a stock. Most brokerages charge you a fee when you buy, and again when you sell stock shares, which will continue to contribute to the loss already built into the stock’s share price. Even are you selling or parceling your shares in one shot over a time period? If you own a big block of shares, you may find yourself paying a fee multiple times when your broker successfully sells all the shares you’ve ordered.
Finally, only if you sell your stock shares, you lose money. The losses are all paper losses until you sell them. So, if after reading through this list, your reasons for selling did not check out, you might want to rethink. You may want to reconsider hanging onto your stocks for a little longer. There is no fixed rule for when a stock should be sold. It depends on your financial objectives; and how much risk you can run for your shares, and what objectives you have for your shares. Many individual investors are “buy and hold” ones, holding stocks for the long term but not forever. Long term investors shouldn’t be afraid of periodic price fluctuations. If the market is falling or taking an odd turn, this is the ideal time to study your portfolio, re-evaluate your investment strategy, and ask yourself some of the above questions. But it’s not just a time to jump ship. Ask yourself before you decide to sell if the stock still meets your financial objectives.