Trading stocks successfully comes down to two vital moments — knowing when to buy and knowing when to sell.
Without understanding both when the best time to buy a stock and when the best time to sell a stock is, you’ll struggle to make a profit. Though nobody can truly predict the stock market, you can utilize a stock selling strategy to help you get the best return on investment.
Much of the reasoning behind holding off on selling a stock is greed. It’s human nature to want a little bit more and the stock market encourages that nature. The worry is always “what if I sell too early?”, not whether you’ll sell too late.
Fortunately, there are good indicators you can use to understand when it is and isn’t the right time to sell stocks. Keep emotions out of it and stick to these three reasons to sell:
It Was a Mistake to Buy the Stock
Impulse purchases are rarely a good idea on the stock markets. You should always do your due diligence and research stocks before you invest. But the reality is many investors get caught up in the hype of the moment and buy stock they don’t actually want.
Alternatively, you may have made an analytical error on how worthwhile that stock actually is. Either way, if a stock was a mistake, sell it. A good general rule of thumb is it’s best to cut your losses on any stock you’re not sure of.
Selling a Stock for Profit
Sometimes, you buy moments before a dramatic rise and hype. It’s a great feeling and so exciting for investors, old and new.
But don’t let it go to your head. Don’t assume you know more than anyone else or that you can predict the market. You can’t and no one else can either.
Often, it’s best to be humble and take the win. Sell while it’s high and doesn’t focus on how much higher it could go. You profited either way.
A great example of knowing when to sell is the current GME hype. Though no one knows how it will play out and maybe the short squeeze will happen, many investors bought at the peak and the stock is sliding.
If you have left it too long and the stock is sliding, try to sell on the aptly-named dead cat bounce.
Sell Stock Based on Valuation
Lots of investors focus too much on their market entry strategy as opposed to their market exit strategy. The reality is, even if you buy at the right time, if you don’t sell at the right time too, then it’s a lost opportunity.
The value of any stock rests on the future of its company. Valuations can definitely be wrong, but they can also be indicative of when to sell.
In general, you should consider selling if a company’s valuation rises far above its competitors. There are exceptions to this of course, but so often overvalued stocks will experience a significant drop.
The Best Time to Sell a Stock
The bottom line is no one truly knows the best time to sell a stock. The historical performance of a stock, or any other stock, does not predict future performance. However, you can increase your chances of selling at the right time by keeping emotions out of it and selling based on data instead.
You can find more helpful articles on the basics of investing on our blog.