Why it is important to sell stock,Not having clear system or process of selling,Reasons for selling the stock
Most of the time, every investor talks about when to purchase the stock as the investor tries to time the purchase of the stock.
But buying the stock is only half job done and the important half work is holding the stock with continuous monitoring the underlying business . “When to sell a stock from portfolio ” is the final work of a smart investor which results in the profit to the investors .
Why it is important to sell stock
The strategy to sell the stock at right time is most important to protect our paper profits and in result protecting our capital. This way the investor survives in the market for long run.
Fear to take decision
Selling the stock is all the more important than buying or holding as the decision of yours of selling the stock may make you regret all the time. The mental bias of greed or fear keeps on giving signals to our mind.
Suppose, if you sold the stock too early and the stock goes much higher after your sold, you leave the gain on the table and get disappointed.
If you delay your decision and sell too late and the stock goes down further after your decision , you lose your paper profits . You start regretting that you should have sold the stock earlier with much profit realization .
In this way selling the stock makes the most of the investors confused.
Human psychology bias –Emotional attachment with stock while selling the stock
The art of selling stock is most important as after purchase of the stock most investors lose the focus. At the time of purchasing the stock .investors have prepared the thesis of the company regarding its performance predictions, the target of the price of share or valuation .
So the question arises” What should be the ideal time for holding any stock ”.
This type of attachment with the share is the mental bias which does not allow the investor to take rational decisions .In this human psychology comes in the way of making a smart decision.
Not having clear system or process of selling the stock
In stock market, every investor has a different approach to selling .The same depend on the planning of investor like time horizon of holding, performance of the stock or individual’s risk taking ability.
Lot of noise in the market like interest rates, policies change ,tax revisions, import export equations ,revisions in prices of raw materials ,crude oil prices and n number of other factors also keep the investors more confused for selling .
But if the earnings of the company that you have invested have dried ,the selling decision is unavoidable . The selling decisions should be reviewed irrespective of share price grow or not?
In this way the reasons for selling the stock can be listed .
Reasons for selling the stock
The reason for selling the stock can be different for every investor due to their personal choice and understanding of the market .
When the buying decision itself detected faulty
If an investor invests in one company after doing due research but at later stage any fraud or forensic accounting issue is detected in the company . In this case the investor should exit from the stock by very next day.
This discipline ,objective and unbiased decision will definitely protect the capital of investor in long run .
“To err is human “a quote from Alexander Pope’s poem An Essay on Criticism
Value Migration–Changes in fundamentals due to changes in consumer habits
When the consumer habits change or environment around any company deteriorates, the decision to sell the company stocks must be reviewed.
For example companies like Nokia , Moser Baer and Kodak became the victims of value migration .These companies could not change themselves as per market requirement and became obsolete .
Other examples are like Radio company, News paper companies also lost their market against competitors having advanced technology . In future also, Auto sector based on IC engines may be disrupted by EV technology . This may also affect Oil marketing companies like IOCL, BPCL or HPCL.
The above migration can be checked and confirmed by dip in sales, profit margins ,cash flows or other key operating fundamentals before the stock price starts to decline. This can be the reason to consider the stock to sell
Better opportunity in market to add another Stock
If any stock in your portfolio is not performing or performing lesser in comparison to other stocks .
This underperformance may be viewed in terms of opportunity cost and overall decrease in returns .
For this situation ,investor may either add new stock in the portfolio or may churn the portfolio exiting from underperforming stock and entering in better performing stock.
The investor recognizes his/her mistake and moves on by leaving the stock behind.
When the price of the company becomes overvalued and lot of buzz for the stock prevails in the market, the selling decision may be reviewed .
However the price increase should not be always the reason for considering the selling of the stock as the prices may be increasing due to continuous improvement of underlying fundamentals of the business.
In this scenario, the selling decision may become a regret at later stage. Hence the investor should try to differentiate between price increase due to fundamental reasons or speculations or hype created by market operators.
Sector in headwinds /breakdown
When the complete sector is affected by any policy change or any de growth reason .This affects the performance of overall sector for longer time. In this scenario selling decision comes in picture to avoid long term trouble in portfolio.
Better decision is to switch the stock to better performing sector.
Technical reason: Stop loss of 30-40 %
When drawdown of more than 30-40% in any stock with high volumes occurs in market without reason not known to investor, it is the high time to consider selling the stock.
The market is showing that something bad happened in the stock and you may be unknown to the reason. Smart investors are selling the stock after understanding the risk. After due study, the selling decision may be taken.
Having both fundamental and technical indicators, such as stock price target in mind, as well as keeping an eye on corporate actions and news is the key to time an exit.
Effect of Large base : Small to large cap company
When a company after holding a long time by investor in his portfolio becomes too big to grow further as per the required rate. As the large base grows lesser than small base .
The stock may be considered for selling and buying smaller company with better rate of growth .
Conclusion : Key Takeaways
The decision to sell a stock can be considered as a mixture of both as an art and science. As the selling framework is prepared by any investor by his experience in investing journey .
The system should also be quantified in terms of numbers to minimize the subjectivity which makes the system a science. Adding both science and art culminates in a common-sense strategy to sell a stock.
This strategy to sell the stock at right time mostly solves the problem of a retail investor.