An investor’s ability to make money in the stock market depends on when one buys and sells the stock. Therefore, the decision to sell stocks is as important as buying them.
Published on 21 March 2023
Some experts believe that the profit or loss made from an investment is decided when the stock is purchased. However, the buyer doesn’t know the outcome until the stock is sold. The two processes are correlated because if you don’t sell the stock at the right time, you cannot gain much even after buying it at the right price.
The secret sauce to generating wealth from your investments is setting an ambitious goal and liquidating the investments when the goal is achieved. Let us assume that your goal is to earn a 3X return. Now, whether you have invested in mutual funds or stocks, you must exit immediately after the value multiplies by three times. You can make a new investment thereafter.
An investor must strike a balance between greed and fear when deciding to sell stocks. Here, you must be as systematic as possible and eliminate any emotional bias from the decision. Another important factor to note is that you must not identify the right time to sell stocks as per stock price. Instead, focus on the health of the underlying business instead of the stock price.
Some strategies can help you keep human emotions out of the decision-making process.
If you hold a stock whose price rises too much too fast, it is a good idea to book your profits. Some stock prices rise over a short period for several reasons, including low liquidity and speculation. These stocks are in the news mostly. However, when the price of a cheap stock rises too fast, the chances of sustaining the high level are low.
If you invest in quality stock, you can book profits and buy it again when the price levels are lower.
Every investor has a reason for picking certain stocks. Seasoned investors perform fundamental analysis and study the company’s operating performance, the top management’s strength to grow the company, and the business environment. After a regulatory or permanent change in the business environment, if the reason for buying the stock is no longer valid, you can make the analytical decision to sell stocks.
If there was a concern with the purchase of the stock from the beginning or you feel that you made an incorrect decision, it is a good idea to sell it. There is no point in losing money and the opportunity cost of not earning from investments in another company.
The objective of having liquid assets is that you can encash them when you require money. If you need cash, you should exit your position. Regardless of where the stock fundamentals stand, your need for cash makes this a suitable time to sell stocks.
To apply the strategies mentioned above, you must monitor the movement of prices. If you are not a professional trader, this can be difficult. Remember to place a limit order on your investments.
It is easy to buy and invest in a stock. However, the tough job is knowing when to sell the stock. You cannot predict the market accurately to determine when you can earn a higher profit or when you might incur a loss. Investing in the stock market involves risk, and if you are new to the field, you must invest only after proper research.