The capacity to profit from stocks theoretically depends on two crucial choices: buying at the right time and selling at the appropriate time. You must correctly carry out both of these options in order to turn a profit.

The decision to sell a stock is typically more challenging than the decision to purchase it. You run the risk of passing up rewards if you sell the stock too soon and it rises. If you sell too soon and the stock falls, you most likely missed your chance. How should an investor proceed?

Many investors struggle to sell stocks, and occasionally this problem can be traced back to human nature's intrinsic propensity for greed. There are methods you can employ to determine when selling is a good idea (and when it isn't).

KEY LESSONS

When it comes to investing, choosing when to sell a stock is much harder than choosing when to buy one.

In general, there are some extrinsic (connected to the investor's finances and lifestyle) and some intrinsic (related to the stock itself and/or the markets) reasons to sell a stock.

Occasionally, a mix of intrinsic and external variables may lead to the decision.

Consider the data carefully and avoid letting human psychology or emotion cloud your judgment (and not your feelings).

Selling Stocks Is Difficult

An all-too-common scenario is as follows: Shares of stock are purchased at $25 with the goal of selling them at $30. When the stock reaches $30, you decide to wait for a few more dollars of gains. As the stock reaches $32, greed triumphs over logic.

The stock price abruptly falls back to $29. You advise yourself to simply wait till it reaches $30 once more. This never takes place. As it reaches $23, you eventually give up in frustration and sell at a loss.

One may say that in this situation, emotion and greed have triumphed over reason. Although you only lost $2 per share, when the price reached its high, you might have actually made a profit of $7.

The essential question is why the investor is selling or not selling, and it may be better to disregard these paper losses than to agonize over them.

Consider using a limit order, which will automatically sell the stock when it hits your target price, to eliminate human nature from the equation going forward.

You won't even have to watch the price of that stock fluctuate. When your sell order is placed, you'll receive a notice.

What Time Should You Sell?

Generally speaking, there are certain intrinsic reasons to sell a stock, i.e., factors relating to the stock itself or the markets. Extrinsic only means factors that have to do with the investor's finances or way of life. The investor may also have intrinsic motives for selling. Sometimes a mix of inner and external variables will cause the sale to be made.

First, let's examine a few internal motivations or elements.

Internal Motives to Sell

When the first purchase choice was incorrect: Most seasoned investors have probably run across this circumstance at some point. You've seen this stock, or more likely, a meme stock, soar to such incredible heights every day that you eventually decide to suspend your scepticism and impulsively place a sizeable purchase order for the stock.

Yet, as soon as you do, you recognize that you probably erred. Selling the stock is the smartest move to make in this situation, even if doing so results in a slight loss on the trade.

Avoid the temptation to chase hot stocks that are running on fumes in the future to avoid making the same error, as doing so could cost you money.

When the cost significantly increases

Selling a stock only because its price has increased significantly isn't always the smartest move. The company's fundamentals may in some situations support the price increases (for instance, sales and/or earnings are increasing more quickly than anticipated by investors).

In other instances, however, the price can have experienced exponential increases only as a result of speculation or for other causes, such as takeover rumours or a short squeeze.

In these situations, the investor would do well to conduct some research to try and determine the cause of the stock gains and, depending on the results, either sell the entire position or sell part of the position and place a stop order to sell the remaining portion if it trades below a certain price.

The decision to sell a stock becomes more important the more its recent gains contribute to your entire portfolio. If you purchased 1,000 shares of a biotech stock at $5 per share, for instance, when the value of your entire portfolio was $25,000, that stock would have made up 20% of your portfolio.

If, after three months, the biotech stock quadrupled on encouraging trial findings and the rest of your portfolio remained the same, the biotech stock would now represent half of your portfolio. Due to the potential harm to your portfolio if the company reversed most of its advance, it may be wise to sell some of your shares in this case and take a portion of the winnings.

As soon as a stock reaches your price objective:

Have you ever owned a stock that had been trading at a discount to where you bought it but had been in the doldrums for years? If you made a deal with yourself that you would sell the stock if it ever returned to your purchase price, do it right away (although you shouldn't have been holding on to that loser for so long in the first place).

In a similar vein, why not sell all of a stock if it reaches a level at which it traded too briefly in the past and you always planned to sell if it did, or would you consider selling a portion of your stake rather than regret another missed opportunity? ... due to the following point…

When a Stock Trades at a Technical Turning Point

When a stock trade is close to—and then breaks below—a multiyear low, it frequently portends further losses ahead. When the technical level is breached on the downside in this situation, it might be prudent to sell the stock right away.

It may also indicate future gains and a wider trading range for a stock if a stock breaks through a significant resistance level on the upside. In this case, it may be better to sell some of the position rather than the entire investment.

Technical analysts also pay great attention to the price charts of stocks to spot additional indicators such as moving average crossovers.

Deterioration of the fundamentals

Any variety of factors, including slower earnings and/or revenue growth, heightened competition, higher expenses and lower margins, or simply price, might cause a stock's fundamentals to deteriorate.

A company's quarterly earnings report or occasionally, "guidance" given before an earnings report may provide the first such indication of deteriorating fundamentals.

When a company releases bad news, like missed profits or reduced future guidance, the market typically reacts quickly and unequivocally, and the stock is likely to fall by double digits.

In these situations, the investor must decide if the stock's fundamentals have temporarily or permanently deteriorated.

When a competing firm releases negative news

Frequently, when a bellwether company in that area produces earnings below expectations, concerns affecting that sector may be brought to light.

Unless you are certain that your stock won't be impacted by the sector's problems, you should think about selling any shares you may hold in a firm in that industry.

When the market appears shaky

There are occasions when the overall market appears to be overextended; at such times, it makes sense to trim the weaker firms in your portfolio. This is no simple task, and it is definitely not a recommendation to engage in market timing. Stocks of corporations with a high debt load or a precarious financial condition may be the first to collapse in the event of a financial earthquake.

Let's now examine a few external causes or variables.

Extrinsic Motives for Selling

Financial justifications:

This may be due to a variety of financial factors for the investor. Like in the tax purposes, the biotech stock discussed earlier, a stock may have increased so substantially relative to the rest of the portfolio that the investor may need to rebalance it to restore balance.

Another option is for the investor to sell a stock in order to record a loss for taxation. Another justification for selling a stock can be that the investor needs the money for real estate or another competitive investment. Those monetary justifications are rather strong ones to support selling a stock.

Lifestyle factors

Changes in one's way of life might also be a valid reason to sell stocks. Younger investors may think about liquidating all or a portion of their holdings to put a down payment on a home or car.

In order to wind down the equity portion of their portfolios and lower their risk exposure, investors who are getting close to retirement may sell equities.

Also, parents are permitted to sell assets in tax-advantaged plans designated for particular goals, including their kids' education.

Mixture of Motives

A mix of intrinsic and extrinsic variables may occasionally prompt the decision to sell a stock or group of equities. Imagine, for instance, that you lose your job as a result of a business restructure and that you are just a few years away from retirement.

You have been concerned about the higher levels and historically high values of the markets, but you haven't felt particularly motivated to take action.

But right now, you'd prefer to hold onto your money so you can invest it in the company you've always wanted to launch. Your decision to sell in this situation is supported by both intrinsic (your change in lifestyle) and extrinsic (the market's high levels/values) factors.

Frequently Asked Questions on how to sell stocks

Should I sell a stock I hold or buy more to average down if the price drops?

It truly depends on a variety of variables, including the type of stock, your risk tolerance, your investment goals, your available capital, etc. Selling the stock can be a good idea if it is speculative and falling due to a long-term shift in its outlook.

Averaging down is a tactic that is worthwhile to think about if the stock in question is a blue chip and has seen a momentary setback.

I like a stock's long-term prospects, but I worry that it might have a short-term decline in value. Exists an Other Way to Safeguard My Negative Rather Than Selling It?

Think about a put option, which provides you the authority to sell the stock for a set period of time at a particular price. Both insurance and put options are expensive.

Can I Sell Stocks the Same Day I Purchase Them?

Absolutely, provided you don't do it frequently. If not, you can be categorized as a day trader. Day trading should only be done by knowledgeable, well-capitalized traders because it can lead to significant losses.

How long would it take me to get my money if I sell a stock?

The T+2 settlement period, which is the normal time frame for receiving stock sale profits for the majority of stocks, is two days long.

Conclusion

Any sale that generates a profit is a good sale, especially if the justification is solid. It may also be seen as a good sale when a sale incurs a loss and the reason for the loss is known.

Only when a decision to sell is driven by emotion rather than by facts and analysis is it a bad one. The important thing to keep in mind is that after the investor has made the decision to sell on the basis of careful and logical analysis, they shouldn't look back or suffer from "seller's remorse."