One of the biggest challenges of investing in the stock market, or any financial market for that matter, is knowing when to sell. It takes both self-control, an in-depth understanding of all economic factors, and proper risk management to make the right exit call. Here are four signs to recognize when you should sell a stock.
Stock Price Hits Your Target
When experienced investors buy a stock, they set price targets for when to sell at a loss and when to sell at a profit. This range is what keeps them objective and enables them to balance risk and reward. If your stock hits its price target, always close the position. To make sure greed doesn’t keep you from exiting a winning position or for hope to keep you from exiting a losing one, set a stop loss and target profit when initiating the order.
Company is No Longer Fundamentally Solvent
A deteriorating balance sheet is another reason to sell a stock, even if it hasn’t hit any price targets. Consistently dropping sales numbers and profit margins are signs that a company may be in trouble. In addition, companies that are needing to borrow funds constantly should also be seen as a red flag.
A Better Stock Comes Along
In fact, it doesn’t have to just stock. If there is a better investment opportunity in real estate, commodities, treasury bonds, or cryptocurrencies, you should liquidate your positions earlier than planned. Opportunity cost, a common term in investing, simply means a benefit that an investor could’ve acquired by going with an alternative asset.
Company Has No Economic Moat
Value investors, like Warren Buffett, screen and select their stock picks by looking at what advantages a company has relative to other companies in its sector or niche. This could be anything, from high-profit margins to brand image and value. If you can’t find an economic moat that differentiates or defends a company’s market share, it is likely a bad stock pick to hold for the long term.
As a last tip, never make impulsive decisions when investing, whether you’re buying or selling a stock. If any of the four aforementioned signs pop up on a stock that you’re holding, you shouldn’t blindly hit the “sell” button. Review the original reasons why you bought the stock in the first place.