Blog

When to sell a share

Investment
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5.5.22
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Joseph Darby

10 times when you should sell one of your shares (stocks)

So, you bought some shares (stock). Maybe you dove headlong into an online trading platform or smartphone application (app) during the Covid lockdowns. Or maybe you’re a seasoned investor.

Hopefully, your investment has gone up in value since you bought it. If not, it might have gone sideways or dropped in value — if that’s the case, try not to worry, it happens to all of us.

Regardless of whether your stock has gone up or down, it’s important to know when it’s time to sell. Knowing when to sell a stock is every bit as important — maybe more so — than knowing when and what to buy.

People have different reasons for selling an investment. They can vary based on the investment or personal circumstances. Sometimes, the outlook for a share isn’t as good as when you bought it. Other times, you just need the money. But there are some common triggers for investors to use in deciding when to sell. Below are seven times that probably mean it’s time to sell:

1. A change in fundamentals

Every company goes through cycles. Sometimes, they’re in a growth mode — adding employees and building revenue streams — and sometimes they plateau. Occasionally, then suffer setbacks that require them to consolidate their business lines or lay off employees.

While owning a stock that you plan to hold for many years, it's important to monitor the company's fundamentals by analysing its financial statements and keeping tabs on its sales, revenue, and management performance. If it turns out that the company isn't performing as planned, you might want to consider selling the stock before the financial situation gets worse. There could also be news or other factors that influence your decision, including any of the following reasons:

• There’s a tough new competitor

• Regulation

• A technological breakthrough is disrupting the market, or about too

• A rival company issues bad news to the market. That can, but doesn’t always, mean the whole sector is about to hit trouble

You don’t have to find another investment right away, but you shouldn’t stick around if the company’s outlook is questionable. Of course, companies currently operate with a degree of uncertainty, so before you sell-up for this reason, take the time to carefully analyse the degree of uncertainty and what, if anything, has fundamentally changed since you first invested.

2. You need the money, or soon will

It's generally a wise not to invest in the stock market with any money you expect to need within the next few years. But if you need the money, that's certainly a valid reason to sell.

There might be any reason you find yourself in need of cash, and if so, one of the great things about investing in shares is you can soon sell up and access your hard-earned cash!

Your needs could be:

• an unexpected investment opportunity

• surprise bills or costs

• to buy a house or another property

• to meet your living expenses because of a job loss or small business failure

• something else

3. Changing economics

Most investments don’t perform well through all economic cycles. Companies in industries that perform well when interest rates are falling, for example, might not always do well when interest rates are rising.

In case you missed it, inflation and interest rates are currently on the rise.

If you own stock in a company that’s highly cyclical, you may want to consider selling when economics are changing before the stock price is impacted too much. In most cases, in the current economic environment, you’ve probably already missed your chance!

4. Your investment approach has changed

The reason or reasons why you bought a stock may no longer apply. Examine why you bought a stock in the first place and ask yourself if those reasons are still valid.

There should be deliberate logic behind each investment decision other than just wanting to make money. Each stock must fit into an overall strategy, or thesis, of investing, and if a particular stock no longer does, then that could be a sign to sell.

5. Taking gains off the table

You may simply want to sell an investment when you’ve made a reasonable gain and want to protect what you’ve built.

The psychology here is similar to sitting at a casino. If you’ve played a few hands and made some money, you might want to take some of your chips off the table and put them in your pocket. That way, if you lose everything that’s still on the table, you’ll still have some gains that you’ve protected, and you can still cash out without walking away empty-handed.

Using this strategy, you can sell part of your position in a stock and keep the cash; or you can double down by reinvesting your gains in something else.

6. There’s red flags

If you own stock in a company and become aware that directors and executives at the company are making poor decisions, these decisions can significantly impact the future of your investment.

Some examples of bad decision-making at the company level include:

• Buying a bad target company or entering a bad merger

• Spinning off a profitable division

• Good managers are leaving, high staff turnover

• Poor personal behaviour by executives or directors

7. Better opportunities exist elsewhere

In a perfect world, you'd always have spare cash to invest for every time you identify an attractive investment opportunity. Since that's probably not the case, you may decide to sell stock to invest the cash differently.

Let's say you notice an incredible buying opportunity for one of your favourite shares stocks and decide you want a larger percentage of your portfolio to be allocated to this investment, or, maybe a small or mid-sized business opportunity presents itself. In either case, you may decide to sell some shares of another stock to free up some capital. There's likely nothing wrong with your original stock but recognising an excellent long-term opportunity elsewhere can be a valid reason to sell.

8. The company is being acquired

Another potentially good reason to sell is if a company announces it has agreed to be acquired. After an acquisition is announced, the stock price of the company being acquired typically rises to a level close to the agreed-upon purchase price. Since further upside potential can be quite limited, it may be wise to lock in your gains shortly after the acquisition announcement.

Specifically, the way the company is being acquired and what will happen after acquisition affects whether selling your stock is the right decision, so take the time to look into this carefully.

9. Rebalancing

Your investment portfolio can become unbalanced in one or more ways. That is why periodically rebalancing your portfolio - which may involve selling some stock - is necessary for most investors. These are two of the most common circumstances preceding a stock sale:

• Owning a high-performing stock: If you own shares that have significantly increased in price, your position in the company may represent a large portion of the value of your portfolio. While this is a good problem to have, you may not be comfortable with having so much of your money invested in a single company and choose to sell part of your stock.

• Seeking to reduce your stock exposure: As you get closer to retirement, it's smart to gradually reduce your portfolio's stock holdings in favor of safer investments such as bonds or term deposits.

10. A price target has been hit

Many investors use price targets to determine when to sell a stock. Investors that use the strategy typically will determine a price range for when to sell the stock at the time of purchase. As a stock price rises, investors can begin selling the position once it reaches the price target range. Investors can either sell it all at the price target or ease out of the position over time at various price targets.

Caution: taxes

According to Inland Revenue, the tax collection department of the NZ government:

“Generally, shares are a capital asset and any gains the seller gets on the share sale are non-taxable income (as long as the shares were held for long-term investment). The purchaser generally cannot claim the price they paid for the shares as an allowable expense.”

But, for your own peace of mind it could literally pay to speak to an accountant or tax adviser before selling up!

What to do when it’s time to sell

Once you decide to sell a stock — whether for one of the reasons listed above or something else — you have to take action. There are several ways that investors can reduce their exposure to a stock. Investors can do any one of these things, or some combination of them, to reduce their risk if the stock they currently own goes down in the future.

Liquidate your entire position

This is when you sell your shares in a company. It’s pretty simple and straightforward and can be done pretty quickly. All you need to do is log into your trading account and place a sell order.

Sell your gains

Investors who have made money in a stock can sell any excess balance over the amount they originally invested. They can reinvest these gains in another stock or just hold onto the cash.

Sell the principal

Instead of selling their gains, investors can also sell the amount they originally invested. That way, continuing the casino analogy, they’re “playing with the house’s money”.

What to do when you’ve got your cash

Once you sell your shares in a company, you still have to figure out what to do next. Of course, you can also try to find another position — another stock to buy. That’s a great option if you find there’s something you like better.

Sometimes, the thing to do is just to hold the cash. That way, you can wait for an opportunity to come along, while enjoying less volatility in the meantime, sitting safely on the sidelines.

If you’d like to speak with one of our financial advisers about anything above, or anything else investment-related, it’d be our pleasure to assist. Simply get in touch.