How to sell stocks
April Lynn L. Tan, CFA
COL Chief Equity Strategist
Chief Equity Strategist April Lynn Tan shares strategies on how to sell stocks depending on different scenarios. Note: This article is lifted from her column in the Philippine Daily Inquirer.
Analysts like me usually focus on teaching people how to buy stocks. However, the process of selling stocks can also be challenging, even though we assume that people automatically know how to sell.
Although there are many reasons why you might want to sell your stocks, I will focus on the most common scenarios encountered by investors.
The first scenario is when you made the right bet and have a profitable stock position.
If you own the stock of a fundamentally sound company that is still cheap in terms of valuation, then you may consider holding on to your position. However, if the stock you own is already fundamentally expensive, and all the analysts you talk to agree that the stock is expensive, then you should consider selling your stock, even if it is a blue chip.
Admittedly, a stock can continue to go up for a long time even though it is expensive. However, the advantage of owning stocks versus other asset classes is that you can sell your position little by little. Because of this, you may consider lightening up instead of selling everything.
For example, if the stock you own has already doubled in price, you may consider selling half of your position. That way, you will already secure your original capital and only put the size of your potential gain at risk. For the other half, you may use technical indicators such as moving averages to time your exit. That way, you can continue to grow your profits.
Just don’t be emotional and make sure to sell your position when the time comes since the main reason why you are still holding on to your stock is just to maximize your profits.
The second scenario is when you made money buying a speculative stock.
In this scenario, I suggest having a trader’s mindset and to use technical indicators to time your exit. Recall that speculative stocks go down as fast as they go up because prices move mainly because of supply and demand.
Liquidity also dries up on the way down because there is usually a stampede of sellers when a speculative stock falls, so you may end up selling at a loss even though you are already profitable. Worst of all, speculative stocks can become worthless after the excitement dies down.
The third scenario is when you lose money.
Although it hurts to sell a losing position, learning how to cut your losses short is equally important as buying the right stocks in boosting the returns of your investment portfolio.
If you lose money by buying stocks of fundamentally sound companies because their businesses don’t perform as well as you expect, you should just sell your position. After all, the reason why you bought the stock in the first place is no longer valid. Also remember that bad things can happen to good people and the same is true for companies.
If you lose money buying a speculative stock, don’t hold on to it hoping that it will rebound someday. There are many speculative stocks that were once high flyers but are now worthless. They can also stay inactive for several years. This is why it’s best to sell your losing position as quickly as possible to minimize losses.
While it is painful to sell at a loss, remember that the pain doesn’t last forever. Moreover, getting rid of losing stocks helps you start fresh and think objectively. This is important so that you will be mentally prepared to capitalize on new opportunities that may arise. Moreover, because you sold your losing positions, you will have more capital to invest in other stocks that have better capital appreciation potential. At the end of the day, selling stocks you bought at a loss doesn’t matter if it allows you to make more money.
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