There are several ways to look at the question and you can roughly divide them into two main categories:
- Personal reasons
- Market reasons
Personal ReasonsIn this first part, well examine some personal reasons for selling a stock. The second part of the series will focus on more market-driven reasons for selling. However, there will be some overlap between the two.
- Risk Tolerance Reached
You bought a company that looked like a steady growing concern, but instead it has turned out to be a roller coaster ride. For whatever reason, this stock is just too volatile for your nerves. Dump this firecracker and replace it with a stock that will let you sleep at night.
- You Need some Cash
An unexpected major bill can sabotage anyones budget. Using a stock, especially one that is underperforming, to solve a financial emergency is another reason to sell. However, take a close look at your personal finances. An emergency cash fund that is not tied up in investments is recommended to avoid, except in extreme cases, liquidating stocks to pay bills.
- Moral, Ethical Conflicts
More and more investors are becoming concerned about the social, environmental, ethical and moral standards of the companies they own. You may decide that a company you own has practices or products that conflict with your social, religious or moral beliefs. There is no better reason to sell if that is important to you.
- The Grass is Greener
This overlaps with market reasons to sell, but there is nothing wrong with dumping an underwhelming stock for a company that offers better returns. The danger here is that active trading can generate significant transaction costs and taxes, both of which eat into any potential gain. Look (and think) before you leap.
- Youve Reached your Goal
It worked. Your plan to reach that financial goal, whether it was retirement or getting a child to college, is finally here. Now is the time to start systematically liquidating those stocks youve tagged for this goal. If you have been trading, make sure you have owned the stock at least one year before selling so it falls under long-term capital gains tax rules.
ConclusionThere may be other personal reasons to sell that are just as valid as these are. Before you sell, consider all the alternatives and consequences. There is nothing wrong with admitting a stock is not working for you and moving on.
Part Two: Market Reasons to Sell