Seven Situations that signify the time to sell a stock

In the stock market, the most common mistakes that investors do are that they sell winning stock early or hold on to loss making stocks for quite long. Everyone in the stock market advices to sell the stocks at the right time. Just like there is a right time to buy, there is also a right time to sell.

How to identify the right time to sell? Are there situations that signify that it is the right time to sell? Following are some of the situations that can help us identify the right time to sell the stocks:

1. Target price

Just like there is a lower limit below which you do not wish to hold the stock anymore (commonly known as stop loss limit), there can also be an upper limit above which the stock is expected to reverse back. This upper limit can be set according to the expected return one wish.

2. Better stock

Consider, you are invested in Company X, giving you a good return over time. However, if a competitor Company Y shows better signs of growing and having a stronger performance matrix. It can be a good time to get out of your investment in Company X and invest that capital in a better company with brighter future i.e. Company Y.

3. Maintaining the portfolio balance

It so happens sometimes that a person invests heavily in a particular sector and a previously well-balanced portfolio becomes unstable. Hence, it becomes heavily relied on a particular sector for better returns. In such cases it is better to exit a few stocks of that sector and invest elsewhere thereby maintaining a good balance in the portfolio overall.

4. Stop Loss

This is the most common situation for exiting a stock. For example, Mr.A buys shares of Company X at Rs.100 and has a stop loss limit till Rs.97. It is better to exit from such a stock at the right time and minimum acceptable loss rather than holding the stock and losing the money over time.

5. Company fundamentals

A change in company’s fundamentals is an alarming situation for actions regarding the stock. An investor would like to keep a close eye on the performance of the company. Reducing sales, profits, patents, etc. or increasing costs can give can an idea to the investor that the company is not performing as well as earlier. This might be a good time to exit the stock before the company’s performance starts affecting the stock price.

6. Dividend elimination

Certain companies give back a lot of their profits to the shareholders in the form of dividends. A number of government owned companies do this in order to maintain a good relationship with the shareholders. However, not all companies make enough profits to satisfy all investors. A reduction in dividend pay-out can be an alarming situation to exit a stock. Certain companies earlier known for distributing huge dividends may reduce or stop this practice when they are on an expansionary phase and need to use the profits for the company’s objectives.

7. Change in company management

Certain entrepreneurs are the reason behind the success and upliftment of their companies. Over the period the management gets old and need a newer group of people to manage the company. In the Indian stock market various cases occurred where huge companies have suffered due to change in management of a person at the helm. An investor should keep an eye on such developments and should do a thorough check of the new management. If the investor has less confidence due to this change, it is better to exit the stock.

There a lot of situations that can indicate the investor the time to exit a stock and no situation are the golden situation that can be a sure indication. Investors need to make their decisions on the basis of their risk appetite and understanding of the variables.

In the stock market, the most common mistakes that investors do are that they sell winning stock early or hold on to loss making stocks for quite long. Everyone in the stock market advices to sell the stocks at the right time. Just like there is a right time to buy, there is also a right time to sell.