The capacity of making money with stocks includes two important decisions. These decisions include buying the stocks at the right time and selling them at the right time. Making a profit involves making the right decisions. The returns on investments are found by the purchase price.
It is said that a profit or a loss is incurred when the shares are purchased. The investor will not know until the shares are sold. When the shares are purchased by the investors it will determine the profit earned. If shares are sold at the right time the profits can be realized. If you do not sell shares on time, then you will not understand the benefits of buying at the right time.
There are three good reasons when you can sell a stock.
- The first reason is that when you purchased the stocks by mistake and you realized that you will not earn profits for you on your investments.
- The second reason is that the stock price has increased drastically and you incurred huge profits.
- The stock prices have fallen down and you do not see the future in still investing in the same company.
There can be many other reasons for selling stocks and it may not be a universal principle for selling the stocks.
When you should sell your stocks
When you buy shares of a company at AED 25, you will have the intention to sell them when the price reaches AED 30 or higher than that. When the stock hits AED 30 you will decide to hold the stock and anticipate increasing the stock price. When the stock reaches AED 32, you will tend to hold the shares with the intention of earning more. Suddenly if the stock price falls below AED 30, the human tendency is to wait until the price increases again to AED 30.
Selling stocks with the human emotion of earning profits is not a wise decision to make earnings in the long run. To remove the human emotion from making an order of sale you can consider limiting order. This option will automatically sell the stock that you are willing to sell when the stock price reaches its target pricing. You need not watch that stock rise higher or downwards. You will be notified when the sale order is placed.
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Sell the stock when you purchased by mistake
When you made a purchase without any proper research and you are incurring losses on your investment. In this situation, you can sell your stock before you incur further losses. You may get to a conclusion that you have purchased the loss stock. The business of your stock purchased company is incurring considerable losses. Sell the stock as you have purchased it by mistake.
A successful investor will always rely on data and analysis. They will not make any emotional decision making. If the analysis has proved that you will incur losses on the stock then sell the investments.
Sometimes it may happen that the prices of stock may go up when you sell your investments. Making a smart decision like investing only the 10 percent and selling the remaining will sometimes yield good returns. You may incur profit when the prices go up.
If stock prices do not go up and you incur losses then do not overreact immediately and sell your stocks. If you have seen a company losing its business market to competitors then it indicates that business is into losses.
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Sell the stock when you incur profits
In a short period of time, the prices of stocks may increase for which you may incur profits if you have purchased them at a lower price. The best investors across the world are the most humble investors. Do not take hasty decisions on selling stocks when there is an increase in price. Study the markets, you may incur more profits than you expect as it is in the best interest of stocks that you hold up.
For various reasons both the external and internal factors, a less priced stock can become a costly stock. When the stock prices increase then sell your stocks and move on. When the stock prices fall, you should consider buying the stocks. Maybe in the future, the prices of the stock may increase.
The increase and decrease in the stock price maybe because of the sudden news in the international market or the domestic market.
Sell stock for cash flow valuation
This is a complicated decision that involves the valuation of stocks. The price value of a share depends on the present value of future cash flows. Since the future is uncertain and unpredictable the valuation of stock will hold a degree of imprecision. There is a margin of safety that investors will rely on as it is a safe point for decision-making.
A general principle is that you should consider selling the stocks of a company when they become significantly higher. There are many exceptions to this principle as it may not apply to all situations. When the profits to earnings ratio increases and exceeds its average profits to earnings ratio over the last 5 years or more you can sell the stock.
When the profits of the company decrease it is a clear indication that the company has a reduction in demand. Look into the annual income of the company, you can decide on purchasing the shares but it is always advisable to purchase shares based on the annual income. Sometimes the annual numbers are impressive but you should understand them well and make a wise decision.
Selling stocks to fulfill your need
This could be the last reason to sell your stocks. There can be times where you need money for your requirements. In order to meet your daily expenses or any major financial expenses, you can sell your stocks and use the money. Generally, in case of dire financial needs, you can sell your stocks. When you want to purchase a new car or a new home, pay for your child’s high school education fee and any other major expenses. Selling stocks in this situation is about the individual’s choice-making.
Take away
Generally, the investors have difficulty in selling the shares and the reason for finding difficulty is the human tendency towards earning more by staying invested in the shares. There are different strategies that can be applied that are useful to know when a stock can be sold and when a stock cannot be sold. The significant aspect of these strategies is that it does not involve human attachments towards the stock investment in the process of making a decision. Any sale should always incur profit. Do not make any sale of shares based on emotions. Always have concrete data and make the right analysis of shares and then sell your shares to realize profits.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
