The real essence of investing in stocks is buying. It is how you can generate commissions and where brokers get their fees. But there are times when you need to sell your stocks. In this article, Robert Peter Janitzek guides us on the signals that indicates it is time to sell.
Why Selling Stocks Is Important?
When investing on the stock market, you first have to determine the buy price. This is vital in determining your profit or loss. You will not know that without selling your stocks. To determine the actual profit, you will have to sell the stocks at the right price. But you need to do it at the appropriate time or else the benefits of proper buying will be gone.
What Are The Reasons for Selling Stocks?
Provided that the stocks is bought at a reasonable price, when trading on the stock market, there are only a few reasons to sell it.
1. There Was An Error In The Analysis
If you found analytical errors on the shares your bought which fundamentally affects the business as a suitable investment then you should sell it even if a possible loss will be incurred. You should rely on data and analysis not on your emotions. So you should learn from your mistakes and make better investment options next time around.
2. Rapid Price Appreciation
When there is a possibility that the price of the stocks will increase in a short period of time, then it is the best time to sell the stock. Robert Janitzek says that while your chances of making money in stocks increases over the long run if you buy it cheap, it can eventually become expensive in a short period of time for a variety of reasons, which could be due to speculation from others. When the shares drop again in the future, you can always buy that share anyway.
3. The Value of the Stocks Is No Longer Justified By The Price
This is the most difficult reason for selling stocks because valuation is half art and half science. Shares of stocks depends on the present value of the company’s future cash flows. In stock market trading, valuation will always have a degree of imprecision because the future is always uncertain. A good rule of thumb is to sell the stocks when its value is already significantly higher than its peers. But there is always an exception. For instance, you cannot sell a Procter & Gamble share that trades for 15 times earnings compared to a Kimberly Clark stock that trades for 13 given its dominance in its market.
Knowing when to sell stocks is important to become successful in the stock market. Investing is always a trial and error process but it is important that you learn to bounce back from your mistakes.