Knowing when to sell a stock is as important as knowing when to buy - more so by some accounts because it is seldom given the consideration as the purchase.
Selling a stock when something has changed with the company and the stock falters is one of the easier decisions. However, it is important to set some guidelines as to what is acceptable in price change.
Some stock will normally bounce around due to heavy daily trading, especially if the stock is considered a leader in its industry.
Remember, you should buy and sell companies not stocks (unless you are trader as opposed to an investor). It is important to understand why a stock's price is lagging.
Did the company have an amazing quarter, but not a spectacular one as expected? Is one quarter of less than anticipated results a sell signal? Is the company transitioning from growth to a more stable business model? All of these factors and more should be considered before a decision to sell.
If the company is doing well and you have a healthy profit in the stock, isn't it a good idea to sell? Maybe and maybe not. Your personal financial situation will, in part, dictate when to sell.
For example, if you are approaching the age when securing your retirement portfolio is becoming more important than growth, you may want to sell and lock your proceeds into a fixed income instrument.
In other cases, it may make sense to take some profits out, but leave a position in the stock. For example, sell 50 percent of your holdings to reinvest and leave the rest in the stock.
Stocks and Gravity
Unfortunately, too many investors have this idea that stock prices react to gravity - if they have been rising, it must mean they are due to fall soon. Certainly, if the stock price has zoomed up way beyond what the stock is really worth, it makes sense that some correction is coming.
However, this describes a situation where you should avoid buying a zooming stock, not whether you should sell the stock. Use interactive stock charts like this one from Yahoo to get the big picture of what may be happening. If you notice a lot of peaks and valleys, but a consistent trend up, you may want to ignore the volatility.
One of the classic mistakes inexperienced investors make is not letting winning stocks run. (The other mistake is the failure to cut losses quickly.) If you master the use of trailing stops, you can safely let a stock run, even if it is moving past its intrinsic value.
These stops will help protect your profits and allow you to exit all or part of your position when certain price points are hit. In this case, gravity may grab the stock and pull it back to reality. If that happens, you will have some protection against losing any gains.
However, you should be aware of how a winning stock is changing your portfolio.
It is usually not a good idea to have more than 10 percent of your investing assets tied up in one stock.
A stock that has experienced a good run may exceed this percentage. It may also throw off your asset allocation.
Under these circumstances, it would be wise to sell off enough of your winner to get your portfolio back into balance.
As long as you still believe in the company and nothing has changed with its fundamentals or market, there is no reason to sell any more than is necessary to rebalance your portfolio.
The most important thing to remember is that you should give as much thought to selling a stock as you do to buying a stock.