When to Sell Stocks

So you’ve bought some stocks, you’re carefully monitoring their performance, and (hopefully) all is going well.

What now? 🤔

Sooner or later, you’re going to have to sell the stocks you own. If you’re lucky, you’re going to do this in order to lock in profits—and if you’re not, you’re going to do it to cut down on losses. But in either case, knowing exactly when to sell can seem daunting—they don’t teach this stuff in school.

Investors, particularly beginners, are prone to emotionally-fueled irrationality. It’s a facet of human nature that can’t be avoided—but it can be controlled. When you experience your first noticeable gains or losses, you’re probably going to feel trigger-happy, and that’s something you need to avoid. ☠️

But there is a method to the madness—you don’t have to do this based on gut-feeling alone. With a little knowledge and a few handy pointers, selling stocks can become a much less stressful ordeal.

You’ll have to put in the work though—to do this properly, you’re going to need a strong grasp of fundamental analysis, stock research, and quite a lot of metrics and ratios that don’t appear too approachable at first glance. You will also need to know when the investing masses are overbuying stocks and steep away from the herd.

However, it’s worth the effort—once you start to master the required knowledge, you’ll start to become a much more confident and successful investor—and that will stay with you for the rest of your investment journey.

Alright, we’ve talked enough. Let’s get into it!

When Should You Sell Stocks at a Profit? 📈

The concept behind investing in stocks is quite straightforward—you buy a company’s stock, and if it continues to perform well, the price of its stock will increase, and you can then sell your shares and keep the difference as profit.

Selling stocks at a loss is more or less a no-brainer. And while knowing how to cut your losses is a skill of its own, it is relatively simple. However, knowing when to sell stocks at a profit is a much more complex question—and much more important to the performance of your investments.

It isn’t as simple as selling as soon as a stock shows a decent increase in price—there’s a lot more that goes into the decision.

First of all, brokerage fees and taxes that must be paid after selling stocks always play a role—and if you don’t factor in these two unfortunate facts of life, what might seem like a profitable sell at first glance can end up actually costing you money. Second of all, selling too early can deprive you of additional profits. Although the leading stock trading brokerages offer low fees, you should still keep them in mind.

Broadly speaking, all of the moments when you should sell stocks at a profit fall into one of a few categories:

1. Fundamental analysis shows that the investment’s long-term prospects have worsened
2. The price of a stock has seen a sudden and dramatic increase
3. The stock’s price has risen to a predetermined price target that you’re comfortable with
4. You need liquidity to finance a large purchase or investment
5. You need to rebalance your portfolio
6. You’ve identified a different stock that is a better opportunity

The first three points are the most important ones in this list—and in this guide, we’ll be focusing most of our attention on them. We’ll talk about the latter three as well, of course—but the first three require in-depth explanations. 

Selling Stocks Based on Fundamentals 📚

The single most reliable method of making sure whether or not you should sell a stock is fundamental analysis. Fundamental analysis uses plenty of metrics, most of which can be found out through a company’s financial statements, to make a comparison between a business and its competitors.

Fundamental analysis is also a key factor in deciding when to purchase a stock. If a company shows promising metrics and ratios, buying it is a rational choice, supported by empirical evidence. You can’t sell without buying—and you can’t buy without researching stocks properly.

However, in the world of investing, nothing is set in stone. A business that shows strong fundamentals right now can just as easily deteriorate in a matter of quarters. Because of this, occasionally reviewing the fundamentals of businesses you’ve invested in is a key factor in deciding when to sell.

If the fundamentals have started showing signs of deterioration, it might be time to sell. Of all of the possible factors to consider, here are some of the most important:

• Earnings per share
• Price to earnings ratio
• Projected earnings growth
• Price to book ratio
• Return on equity
• Dividend yield (for dividend-paying stocks)

However, none of these metrics exist in a vacuum—they should always be considered along with other factors, such as industry-wide trends, the overall state of the economy, changes in management, competition, and market sentiment which has been optimistic for a long time.

Another important factor to consider nowadays are government decisions and legislation. For example, the FED is trying to keep interest rates low, but if they jump significantly, some debt-dependant companies might go under along with their stocks.

Looking at a company’s fundamentals can, broadly speaking, lead to one of three conclusions. Either you hold the stock because of good fundamentals, sell it because the fundamentals have significantly worsened, or keep it in spite of worsening fundamentals—but the third option should only be considered if you truly believe the business will recover.

Selling During a Bubble 🛁

You’ve probably already heard of stock market bubbles. When these events occur, prices can rapidly change—and that can seriously imperil your investments. But bubbles aren’t some mysterious force of nature—they’re caused by a pattern of behavior that can be identified, and this allows you to avoid the enormous losses that they cause.

First of all, let’s dive a little deeper into the how and why of bubbles. A bubble occurs when an asset or commodity starts trading at a price that is way beyond its realistic value.

Bubbles are caused by the irrationality of investors who, believing that they can make huge profits in the future, dump enormous amounts of money into investments that aren’t worth nearly as much as they are trading for. 

This sort of behavior cannot last forever, of course—and once the bubble becomes unsustainable, it pops. When that happens, huge drops in price occur—and almost all of them lead to the asset in question being traded for less than it is actually worth.

In the event of a bubble, a company’s stock, a whole industry or sector, or even the whole market is overvalued. This can be spotted by looking at a company’s fundamentals—and if they don’t line up with the stock price, you’re dealing with an asset whose price will correct itself sooner or later.

Bubbles cause huge drops in price. If you’ve identified that a bubble is occurring, sell your stock—the small amount of profit that can potentially be made by holding on a little longer is far outweighed by the huge losses that you can accrue at a moment’s notice.

Examples of Past Bubbles 👇

We’ve explained bubbles in the section above—but they might still seem way too abstract and distant. However, if we look at a couple of real-life examples, the dangers that stock market bubbles pose to your investments become much more apparent.

In the 1990s, the internet took the world by storm. We’re all aware of Microsoft, Apple, and HP—these are companies that have stood the test of time. However, there are countless more businesses that didn’t and that no one remembers—because of the dot com bubble.

With the rapid expansion of the internet, investors poured billions of dollars into a variety of businesses. Fundamentals were overlooked, stock prices rose to enormous heights, with the stock price of certain companies growing twofold or threefold on the first day of trading.

In retrospect, it is obvious how irrational and dangerous this frenzy was—but at the time, everyone thought that they had picked businesses that were sure to flourish. When reality caught up, panic selling ensued—and $1.755 trillion in value was simply wiped out.

Another bubble that you’ve probably heard of is the U.S. housing bubble. From 1996 to 2006, the price of the average home in the U.S. doubled. The same principle as before applied here, as well—in reality, nothing happened to justify such an increase in price. When the bubble burst in 2008, it sent the U.S., and later, the entire world, into the great recession.

We might be approaching another bubble right now. It is impossible to 100% sure, but certain facts have quite a few institutional investors worried—for one, the incredible surge in tech stock investments in the midst of a slowed economy.

Hyped-Up Stocks 🎈

We’ve all become keenly aware of the effect that media, particularly social media, can have on the price of stocks. The most glaring example, of course, is Gamestop. Whereas just a short while ago it was trading for around $2 per share, in recent months it has seen trades occurring even at the whopping price tag of $347.

The GME saga is well-known—but it is far from the only hyped-up stock. In fact, the same online communities that drove the GME frenzy have focused on other companies such as AMC, Bed Bath & Beyond, and Blackberry, seeking to replicate their past success.

While events such as these are fascinating, and the allure of vast returns in such a short time is quite powerful, hyped-up stocks aren’t the way to go. The hype behind these surges does cause a dramatic increase in stock price—but trying to time the market in such a way to profit off of those huge swings is a huge risk.

In fact, hyped-up stocks act in a similar way to bubbles—a huge influx of speculative behavior drives the price of a stock up, without any ties to its real value, and when the inevitable correction occurs, most people end up losing money.

Buying during one of these “hype bubbles” is never a safe choice—you’re acting on old news and following the herd, without a defined investment thesis and target price. If by a stroke of luck you already own a stock that gets hyped up, define a reasonable price that you’d sell at in order to profit before the bubble bursts.

Reasons to Sell a Good Stock 💸

As strange as it may sound, there are times when you should sell stocks that are performing well. We’re going to go over the most common reasons why one might sell a winning stock.

First of all, if your portfolio has drifted away from its desired asset allocation, you will need to rebalance it in order to return to a proper level of diversification. In most cases, this entails selling stocks—and if you’ve done your homework, they will be winning stocks. 

When that happens, go back to the drawing board and take another look at the fundamentals—find the company that you expect to provide the smallest returns, and sell their stocks to return to your desired asset allocation.

In a similar vein, if you identify a better opportunity, selling a good stock is perfectly fine—in fact, it is the right call to make. If stock A is performing fine and netting you returns of 9%, but stock B would provide returns of 13%, the fact that stock A is doing well matters little. This concept is referred to as opportunity cost.

If you need additional capital to finance a large purchase or something important (a house,  college education for your children, or a down payment for a new home), selling stocks is a perfectly legitimate option—after all, things like those are the very reason why we invest in the stock market.

If you’ve bought some stocks for the purpose of dividend investing, reduced or eliminated dividends are a clear signal that it is time to sell those stocks. Likewise, if you’ve invested in growth stocks and they’ve stopped growing, it’s time to jump ship. 🏃‍♂️💨

When Not to Sell a Stock 💡

Just as important as when to sell as stock is the question of when not to sell. We’ve already talked about fundamentals and bubbles—but let’s take a moment to deal with the topic of when you should hold stocks.

For most investors, the decision to sell stocks isn’t a rational one—it is driven by panic, speculation, or pure misunderstanding. By and large, investors are skittish—a single bad quarter or just a little bit of negative press will send most retail investors scrambling to sell.

This is a horrible approach toward selling stocks. We mention this point again and again, but it cannot be repeated enough—the health of the underlying business trumps all other factors. 

If you’ve done your due diligence, and have reason to believe the company that you’ve invested in has good long-term prospects, small drops in stock price are actually a great opportunity to buy stocks at a discount.

That which holds true for bad quarters and bad press also holds true for recessions and crashes. It is nerve-wracking, we know that, but if you’ve invested in sound businesses, they will recover after any recession or crash—and selling your stock at that point is just depriving yourself of future profits.

Long-term prospects are the most important things when it comes to investing. If you think a company is viable in the long-term, a bad year or a recession is simply a very convenient time to identify undervalued stocks.

How to Set Selling Targets ✅

Selling targets are perhaps one of the best ways to ensure a smooth, stress-free approach to selling stocks. Setting selling targets is a strategy that is most commonly employed by day traders, but it also has a host of benefits for investors that are focused on long-term approaches.

In essence, setting selling targets means that before you decide to even invest in a stock, you figure out the rate of return that you want to get from it. There’s no one size fits all solution here—the rate of return that you’ll be looking for will depend quite a bit on the fundamentals of the stock—but the overall idea is to set a predetermined goal that is reasonable.

Say for example that you buy an undervalued stock that shows good prospects in the following five years. You’ve done your homework—you believe that the business will expand and grow and that the stock’s price will increase in the next five years.

Obviously, you can’t predict everything so to counter that, you come up with a reasonable estimate—a price at which you’d be willing to sell the stock. This has a host of benefits—it brings future structure to your investment strategy, and sticking to it will prevent you from making emotional, hair-trigger decisions. 📉

In essence, this strategy depends on placing complex market orders—the most important of which are stop-loss orders. Sell limit orders allow you to automatically sell stocks when they reach a certain price.

There’s no straightforward answer to the question of which price you should set—this should always be based on the stock’s fundamentals. However, be that as it may, having a predetermined price point at which you sell a stock is a great way to avoid irrational moves, and one of the most effective ways to lock in profits.

8 Questions to Ask Yourself Before Selling Stocks 📣

To cap off this guide, here’s a handy checklist that you can refer to when you’re mulling over whether to sell a stock or not.

1. Did You Incur Losses? 📉

First of all, you have to assess how risky the decision that you’re making is. If you’re thinking of selling a winning stock, you have quite a lot of breathing room—but when you’ve already lost some money investing in a certain stock, time is of the essence.

There’s no golden rule here—but a lot of certified financial planners rely on a rule of thumb that you should sell a stock if it falls 10% or more. 

However, there’s no one-size-fits-all solution here—take a good hard look at the company’s long-term prospects, be honest about your risk tolerance, and decide if you have the time and risk tolerance necessary to hold the stock instead of selling.

2. Does Your Overall Portfolio Need Rebalancing? ⚖️

If your portfolio needs rebalancing, the most likely case is that you need to sell some stocks. Rarely anyone ends up buying too many ETFs or bonds.

If your portfolio has deviated from the desired asset allocation, you need to take a good hard look at your investments in stocks. Unbalanced portfolios are undesirable because of diversification, but weathering that small risk for a couple of months if some of your stocks show good potential for growth might be worth it.

3. Have the Fundamentals of the Company Changed? 🕵️‍♂️

If the fundamentals of the company have changed for the worse, jumping ship before the stock price corrects itself is the way to go. However, if the fundamentals have remained the same or even improved, you should consider holding the stock.

It’s simple, really—good fundamentals are a clear sign that a business is healthy, and that it will continue to grow. This translates to further increases in price, so holding is the wiser decision. Short-term disruptions, such as the recent situation with the Suez canal can give a false perception that a stock is losing value.

If you need money to finance a large purchase or investment, start by selling off the stocks whose fundamentals show the worst changes first.

4. Have You Considered the Tax Implications of Selling? 💸

Although it is an unpleasant topic, taxes always play a role in your bottom line. When it comes to selling stocks, there are two things that you should focus on—tax-loss harvesting, and whether or not you’re subject to long-term capital gains tax.

Tax-loss harvesting is a method by which you use losses to reduce your overall tax bill. A lot of top-tier robo advisors offer this service free of charge, but attempting to make use of tax-loss harvesting by yourself is generally discouraged.

When it comes to long-term capital gains tax, whenever you consider selling a stock, consider how long you have owned it. If you’ve owned a stock for more than a year, you’ll be subject to a much lower tax rate when selling it. 

This should always come into play when calculating what the best course of action is—holding a stock for another few months despite slightly dropping prices could end up being the better play here.

5. Have You Considered Transaction Costs? 💰

Although transaction costs have seen dramatic cuts in the past decade due to the proliferation of mobile investing apps and innovative platforms such as Robinhood, they are still there.

Although the decrease in transaction costs has made business easier, it has also made it easier to forget about transaction costs altogether. Don’t fall into that trap—fees can easily eat away at your profits.

6. Is the Stock’s Trading Volume Normal? 📊

A stock’s trading volume can give you a good idea of how the market generally perceives the stock at any given time, trading volume is important—if it suddenly increases, it is a clear sign that investors are showing an increased interest in a stock, and it usually correlates with stock prices increasing.

On the other hand, uncharacteristically low trading volumes generally coincide with dropping stock prices, and they also make it much harder to sell stocks. Whenever a stock’s trading volume shows a sizable decrease, you should consider selling the stock in question. Keep in mind, however, that overall stock trading volumes have been falling as of late, so take everything with a grain of salt.

7. Is the Stock Receiving a Lot of Attention from the Media? 📺

If a stock is receiving a lot of attention from the media, things can go one of two ways. If the attention is positive, the price is likely to increase rapidly—and if the newfound price exceeds what the fundamentals of the stock support, you should make use of this short-term increase and sell.

If, however, the media attention is negative, consider selling—but only if the stock’s fundamentals support this choice. If a stock is receiving negative press but shows strong fundamentals, holding it is generally the superior choice, as the price will bounce back and continue climbing in time.

Beware, however. Media attention can also be used for nefarious purposes—in what is called a pump and dump scheme, like the recent cannabis penny stock scam.

8. Do You Want to Sell All of the Stock That You Own in a Company? 🔎

Last but not least, consider if you want to sell all of the stock that you own in a company. If a company’s fundamentals have significantly deteriorated, selling all of your stock is a reasonable choice—but that won’t always be the case.

If a company’s fundamentals show signs of change that are negative but aren’t too drastic, consider selling a percentage of the stock that you own. If you are unsure of how the company will perform in the long term, this allows you to both lock in profits and potentially secure additional gains in the future.

Get Started with a Stock Broker

If you’ve made it this far, you already know—finding the right time to sell can be tricky. Sometimes, there are just very little indications to pick up on.

Luckily, the leading stock trading platforms have a number of tools and resources available to make the process easier. Here are a few popular brokers, trusted by investors around the globe: