Say you have a stock that had a good run and now you wonder whether you should take your profits and run or wait for a sign that the stock is about to reverse direction.
There are several warning signs that can tip you off to changes that may mean the price is headed south.
Fundamentals FailIf the companys fundamentals (sales, debt, cash flow and so on) begin to show signs of stress, it may mean something has changed that will negatively affect the stocks price.
Dont wait for the market to panic over a decline in revenue or another key fundamental, be prepared to unload the stock while you still have a healthy profit.
Target PriceMany investors set a floor on the stocks price so that if it falls below a certain level, they sell. You can also set an upper limit that triggers your sale.
The rationale here is that you may be afraid that the stock will have a difficult time supporting a market price above a certain level and any hint of bad news will send the price into a nosedive.
Other investors simply say, I want to make this return and when I hit that, Im going to move on to another opportunity.
Dividend Cut or EliminatedWhen companies start cutting or eliminating dividends, it is time to seriously consider dropping it.
Dividend cuts are serious events and signal financial difficulties that investors should pay close attention to.
Strategies for SellingOther strategies for selling include the thoughtful consideration that events are moving against your stock and you need to act. Here are some ideas:
- Watch out for hype. If a stock you own becomes the focus of media attention and receives a lot of buzz, it may be time to look at taking a profit. These types of stock-feeding frenzies attract inexperienced investors who bid up prices only to have the market collapse when the hype dies. If youre not careful, you can watch the price fall right past your profit.
- Watch growth. Growth stocks grow. When they stop growing or growing begins to slow, its time to move on. The market is not kind to growth stocks that fail to maintain their growth.
- Take part off the table. If you have a good profit in a stock, consider selling part say 50 percent and taking your profit while letting the remainder continue to grow. This way you lock in a certain level of profit and, if you follow the other tips here, you can bail on the stock when it starts to fall with some more profit.
- Better deal. Remember, there are other stocks that may provide a better opportunity with less risk. Just because you have a good stock with a nice profit, doesnt mean you shouldnt stop looking for a better deal.
Dont be too QuickWhile you always want to maximize your investment, dont eat into your profit by running up a big bill at your stockbroker in commissions through excessive trading.
A few smart trades a year will beat a dozen mediocre ones any day.