Knowing when to Sell your Stocks

The answer to the question ‘when should I sell my shares?’ largely depends on what kind of investor you are. Investors generally fall into one of two categories; they either pursue a Long Term Buy and Hold (LTBH) strategy, or else they indulge in frequent short term trades. The triggers for selling differ depending on which strategy you decide to pursue.

Long term buy and hold investors buy into stocks that they believe are reasonably priced, well managed, and which they believe have good long term prospects. Having purchased, they then sit back and enjoy the dividends. They don’t, however, pay too much heed to short term fluctuations in the share price. As long as they remain convinced that the company is profitable and has good prospects, they will calmly ride out any short term storms.

The sell triggers for LTBH will typically therefore be things such as:

– Retirement. The investor may wish to sell their shares and put the money into bonds to receive a fixed income.

– Financial need that means they need to realise cash.

– Loss of belief in the company that they are invested in. LTBH investors may be happy to ride out short term fluctuations but if they become disillusioned with the company’s management and performance, then they may decide that it’s best to sell the stock and buy into another favoured company.

Short term frequent traders, on the other hand, are always looking for an opportunity to make a quick buck and therefore more actively scan the market for signals to sell or buy. They may set personal rules to guide their decisions, such as ‘if share price rises to 30% greater than purchase price, then sell.’ They are interested in events that effect market confidence. For example, the recent credit crunch/sub prime concerns have caused stock prices to become depressed. This means that many stocks are now much cheaper than they’ve been in recent years, and may be seen as presenting an excellent buy opportunity. Similarly, if they feel that market confidence is high and shares prices are inflated, then this may be the signal to sell.

The general principle, of course, is that (except in very exceptional circumstances) you shouldn’t sell at a price that is lower than the price you paid for the shares! Your aim should be to make a good return from your investment. You should also take the costs of buying and selling shares into account. Frequent trades mean you may incur quite hefty commission fees, and this will reduce the profit margin that you get from your shares.

Finally, if you are going to be a serious investor, then it’s important that you give a lot of thought to what kind of investor you’re going to be, and what you want to get from your shares? For example, are dividends important to you? Or do you just want capital growth? Or a bit of both? It is only once you’ve firmed up your own personal investment strategy, that you can start to properly determine what the relevant sell triggers are for you.