How to exit a stock at the right time ?
It is true that nobody can time the markets perfectly but with some research and a clever planning, you can fine tune your exit timing. You must have experienced yourself that taking an entry into a trade is much easier than getting out of it. The timing of the exit has a huge impact on the outcome of the trade.
History suggests us that retail investors are not so good at market timing. Most of the times, they are late entrants to the market. Selling is much difficult and equally important as buying. In this article, you will get to know how to exit a stock at the right time.
The big money is not in the buying and selling, but in the waiting.
These are the most common factors that people look for when they take a decision to exit a stock.
- Fundamental of the stock is deteriorating.
- You bought a stock hoping for triggers but that didn’t happen.
- Your price target is achieved.
- Sell when a stock is overvalued.
- Your stock has a shockingly high price-to-earnings ratio (P/E ).
- The company’s competitive advantage is in danger.
- The company makes drastic changes in its direction or leadership.
- The company’s sales are stalling or falling.
- The company’s profit margins (and earnings) are shrinking.
- The company recently cut its dividend payment
But all of these are secondary reasons. These are not completely incorrect but these are all secondary and not the major reason due to which one can exit a stock. Off-course you might be thinking what is primary then?
While buying you do enormous research, you go through detailed fundamental, technical analysis but while selling you sell based on only price movement. As long as you are not selling you are not making real profit and loss. That makes selling even harder. The harsh reality is no one can predict market accurately because there are so many factors that determine that. Few factors we can understand, few we can’t understand, few we have control over but few factors we don’t have control over. You should sell a stock only when a stock is technically broken it’s short term /mid term/long term resistance level depending on your strategy and has entered in a downward trend. The exit strategy must be defined very clearly beforehand.
If you have a little bit of experience in investment, then you probably know or have read about the importance of buying a stock. True, buying is important, but knowing when to sell a stock is equally important, especially if you wish to make any profit in the first place.
So, what defines the best time to sell a stock?
If you are wondering whether you should sell a stock or not, you should ask yourself the following questions before reaching to a decision.
1. Are my Facts Wrong?
If your facts didn’t check out and the investment you made proves to be a bad one, then this is undoubtedly the time you should cut your losses sell fast. This is not an uncommon phenomenon and it might be the result of the company’s poor management or a distinct poor business decision.
2. Are the Facts Changing for Worse?
Similar enough to the previous question, if you can observe that the business whose stock you have acquired is deteriorating, by an ongoing decline in management quality or poor budget allocation, then you should sell.
3. Is there Scarcity of Cash?
If cash is what you’re looking for and you have found an alternate business offering a greater margin of safety, then you should be considering about selling your stock.
If you have answered “yes” to any of the questions mentioned above, then it’s time you sold and moved on.
Most investors seem to be more hesitant in selling a stock. This is understandable to a certain extend, considering that one might have become sentimentally attached to it or might be less eager in accepting that they have made a poor investment decision. However, this is the world of investment, so if a stock does not serve the purposed and the conditions it did when you first purchased it, then it is time to sell it and move on to a different one.
On the other hand, some investors might be facing a conundrum of “to sell” or “not to sell” for a number of different reasons, which seem to be valid, but not good enough as they are on their own.
Let’s see some not good enough reasons to sell a stock:
– The stock is overpriced
First of all, what exactly does “overpriced” mean? A good business with an expanding earning power, will most definitely appear as “overpriced”. It is advisable to stop looking only at P/E multiples, but also take into consideration the “expected return” from current levels. Also, consider this scenario: Suppose that the company quadruples in size in the next 10 years, does it matter if the stock is overpriced by 50%? Try to keep in mind that no one can say with any precision what signifies an “overpriced” stock for an outstanding company with a stable high growth rate.
– The stock has gone up 5 times since my buying price
The stock has surged 50% in the last month – I expect a correction, so I’d better sell the stock now and buy it again at a lower price- I should sell before I lose my profits. When making a sell decision, you should not be looking at the stock price. Instead, what you should be looking at is the business itself. You should focus on evaluating whether the business is going up or down in the next few years. Finally, the purchase cost is not important. What matters is how the stocks price will be determined from today on, because this is what will determine the quality of your investment and whether you will make a profit or not.
As Philip Fisher stated: “If the job has been correctly done when a common stock is purchased, the time to sell it is – almost never.”
This method of exiting stocks could be one of the most crucial reasons due to which you continue to be successful, even during difficult markets. Regardless of whichever exit strategy you choose, define your plan and follow it.