Stock Investing: Know When To Sell?

5 min readJul 14, 2018

Have you felt regret when you sold stocks of a company early on some news or tip you received, only to find that the same stock skyrocketed and you never got a good price to buy that stock again? Have you held on to struggling stocks for a longer period, then sold them in frustration only to incur losses?

Knowing when to sell a stock is at least as important as knowing when to buy, yet you sell the winners too early and take your profits and hold on to your losers for a longer time period. In this article, I will highlight key points you should consider before you pull the trigger on selling a stock.

“Profits on paper are not the same as money in your bank account “— Jim Cramer

Key Questions You Should Answer Before Selling A Stock

The key point to remember is to constantly monitor the companies you own, rather than the stocks you own. A company might have very good fundamentals and a competitive advantage over its peers in the industry but it can have a beaten down stock. It is much better to spend some time reading about the news surrounding the company stock you own and the industry in which the company operates rather than watching the stock price like a hawk.

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”
— Warren Buffett

With those points in mind, I have put together following checklist of questions you can use as a reference before you make a stock selling decision.

Have the fundamentals struggled or deteriorated over a long term?

Has the raging growth of your company slowed down? Is the company having a tough time finding profitable, investment opportunities and the company’s competitors are eating away the company’s margins? It is time you need to reassess the future prospects of the company. If you feel they are getting worse and would not let you meet your investment goals based on your investing time horizon, it is time to sell.

Has the stock risen too far above its intrinsic value?

At times, the market offers to pay you a price way higher than the actual intrinsic value of the stock. You can take advantage of other investors’ good nature. You should ask yourself how much more is the market willing to pay you and whether the stock has enough momentum to continue rising in the near term. Remember, you don’t want to sell companies which have a durable competitive advantage just because they are pricey, else you will have to incur heavy capital gains tax and would not be able to take advantage of the power of compounding. However, there is no harm in taking some profits of the table.

“No one got hurt taking profits” — Jim Cramer

Can you use the money for something better?

As an investor, you should always be looking for companies with strong fundamentals that have a durable competitive advantage that can give you steady returns year-over-year which enables you to take advantage of the power of compounding.

“The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns. That becomes a compounding machine.”
— Warren Buffett

There is absolutely no shame in selling undervalued, struggling investments, so that you can free up funds to buy another company stock which has a good growth prospect.

Did you make a mistake or miss something?

While looking at the fundamentals of the company did you miss something worth considering? Did you do your due diligence by going through the company’s financial statements? Perhaps, you thought that the management of the company was capable enough to turnaround the company’s business, however, that did not happen. Or may be you underestimated the company’s competitors. In any case, it is not worth holding on to a stock if the reason you bought it for is no longer valid. Time to cut your losses, take your tax break and move on.

Do you have too much money in one stock?

If you have a diversified portfolio of stocks, a good reason to sell is when you picked a winner which has skyrocketed. I am not suggesting closing out your position. However, if that bullish run has exceeded the stock’s percentage allocation you had in mind when you built your portfolio, it is time to think long and hard about trimming and taking profits to maintain a balanced diversified portfolio and prevent too much concentration in one company stock. Remember, never put too many eggs in one basket.

Summary

Always consider your investment goals and the reason you bought a stock before selling a stock. The company might be going through a temporary downturn, however, if it has strong fundamentals, sound management and business with a durable competitive advantage, the company can bounce back given sufficient time.

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Disclaimer

The content in the above article is for information and educational purposes only. It is not intended to be an investment advice. Please consider the risk involved and your personal financial situation before investing or seek a duly licensed professional for investment advice.

About me

Amrut is a Full Stack Software Engineer who is passionate about tech and software development in Web and Mobile. He likes to write about coding, investing, finance and economics. He strongly believes in adding value to people’s life through quality work. He also loves to watch and discuss about American Football.