A strong case can be made that investing in stocks should be an important part of everyone’s long-term financial plan. With the growth of online trading platforms and the widespread availability of credible information from financial websites, social networking and media sources, it’s never been easier to buy stocks.
See: 3 Things You Must Do When Your Savings Reach $50,000
It’s also never been easier to sell stocks, but selling at the wrong time can cost you some or all of your investment. That’s why it’s important to know when to sell your stock before you invest your money.
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When To Sell a Stock
You’ve probably heard the classic investing advice: “Buy low, sell high.” The problem? No one can perfectly time the market–there’s no crystal ball to tell you when a stock has peaked or when a downturn is about to hit. Still, there are reliable signs that can help you decide when it might be time to sell.
1. When Valuation Is High
A company’s stock price is based on a number of factors. Stocks can get ahead of themselves and rise to unreasonably expensive valuations. When that happens, it might be time to sell.
One of the most widely used and effective methods for measuring valuation in the stock market is the price-to-earnings ratio, commonly referred to as the P/E ratio. The P/E of a stock is calculated by dividing its stock price by its reported or projected earnings. A high P/E — especially as compared to the P/Es of competing companies, and with no apparent reason — reflects a high valuation and could indicate an overpriced stock.
Selling while the stock is overpriced means you can get more than the stock is worth and avoid an eventual correction.
2. When Rebalancing Is Necessary
Many financial advisors recommend setting your asset allocation when you first build an investment portfolio. This allocation acts as a roadmap, outlining how much of your money should go into different asset classes, like stocks, bonds, or cash equivalents.
Over time, market performance can throw that balance off. For instance, if stocks perform exceptionally well, your original 60/40 split between stocks and bonds could shift to 75/25. When that happens, it’s a good idea to rebalance. In this case, you’d sell some stocks and buy more bonds to bring your portfolio back in line with your original strategy.
3. When Market Sentiment Is Negative
Market sentiment, also known as investor sentiment, plays a big role in how stocks move. Bad news can easily trigger a wave of pessimism, leading to broad market declines, even if the underlying fundamentals haven’t changed. When sentiment turns negative, it can be tough for any stock to gain traction.
If you’re investing for the long haul, you may be able to weather these short-term swings. But if your time horizon is shorter, you might consider selling during downturns driven purely by investor psychology, especially if you need to preserve capital or avoid extended losses.
Market makers help ensure you can always sell your stocks, though not necessarily at your desired price. But if you’re often forced to sell during downturns, it may be a sign that your asset allocation needs a second look.
4. When a Company Shares Bad News
When a company reports strong earnings, rising sales, and positive news, its stock price typically climbs. On the flip side, bad news often sends the stock lower.
Long-term investors can usually ignore short-term fluctuations, but if a company’s fundamentals take a real hit–like cutting its dividend or losing a key advantage–it may be time to sell.
Leadership changes can also shake investor confidence. For instance, Apple’s stock dipped after Steve Jobs passed away in 2011, though it later rebounded as faith in new leadership grew.
It’s wise to stay informed about the companies you own, but hold off on big decisions until you understand the full story.
6. When the Stock Has Done Its Part for Your Personal Financial Goals
When a stock you own has surged in value, it’s natural to hesitate–but taking profits can be a smart move. There’s no set rule for how much gain is enough; it depends on your goals and risk tolerance.
For instance, if you aimed for a 10% return and the stock jumps 25% in a few weeks, it may be time to cash in. As market legend Jesse Livermore said, “No one ever went broke taking a profit.”
A big gain can also throw off your portfolio’s balance–another good reason to consider selling and rebalancing.
7. When You Need a Tax Break
No one buys stocks hoping to lose money, but sometimes, selling at a loss can actually work in your favor. Letting go of underperformers not only clears out dead weight from your portfolio, but it can also help reduce your tax bill.
So, when should you cut your losses? Many experts recommend selling a stock if it drops by 7% to 8%.
The upside? The IRS lets you use capital losses to offset gains. If you made a profit earlier in the year and are bracing for the tax hit, selling a losing stock can help soften the blow. This strategy, known as “tax-loss selling,” is a smart way to trim weak investments while lowering your taxable gains.
When Not To Sell
A few rough days in the market can tempt investors to panic-sell, but that’s usually a mistake. Selling in a downturn locks in your losses, and if you wait too long to get back in, you might miss the recovery entirely.
Consider this: Investors who stayed in the market from 1980 to early 2022 saw average annual returns of 12%, according to Morgan Stanley. But those who sold during slumps and waited two years to reinvest only earned about 10%.
There are valid reasons to sell a stock, but a short-term dip isn’t one of them. In fact, it might even be a great time to buy.
How Long Should I Hold a Stock?
Day traders often sell a stock just hours after they’ve purchased it. Long-term investors sometimes hold a single stock for decades.
There’s no one-size-fits-all answer, but in general, you should hold a stock as long as it aligns with your investment goals, risk tolerance, and the company’s long-term prospects. Sell if the fundamentals change, your goals shift, or the stock becomes too risky or overvalued.
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FAQ
Here are some quick answers to common questions about selling stocks.
How do you decide when to sell a stock?
Deciding to sell a stock is complicated, but ultimately, it comes down to whether the stock is serving your financial goals.
If, for example, the company has just shared negative news about its prospects, the stock may no longer earn you a profit, so it could be a good idea to sell before it drops too far. Or perhaps the stock has simply met the return goal you set for it, so you might sell the stock to rebalance your portfolio.
What is the best time to sell stocks?
The best time to sell a stock is, of course, at its peak, so you make the most profit. However, it’s impossible to judge exactly when that peak will be, so you should sell stock that is no longer meeting your financial goals.
Just don’t panic and sell too soon – for most people, the stock market is a long-term game, and many stocks that go down end up higher in the future.
At what percent should you sell stock?
There is no set percentage at which you should sell your stock. Ultimately, it depends on your goals and comfort level.
Is it better to sell stocks when high or low?
It’s best to sell stocks when they’re high to make a higher profit. The exception, however, is if a stock is failing entirely and has reached a low point you are not comfortable with. In that case, it might be best to sell and cut your losses.
Daria Uhlig contributed to the reporting for this article.
This article originally appeared on GOBankingRates.com: How To Know When To Sell a Stock
