7 Tips for Deciding When to Sell a Stock

Before you invest in a stock, you should think about your sell strategy, since deciding when to sell often can be more difficult than deciding when to buy. Having a disciplined approach to selling based on specific factors that you have identified ahead of time can help you to take the emotion out of the sell decision and, as a result, to make better choices.

Here are 7 tips to help you develop a thoughtful (and profitable) approach to deciding when to sell a stock.

1. Know Why You Bought the Stock. If you aren't clear on why you bought a stock, it will be very difficult to know whether your purchase rationale still is intact.

2. Know What You Expect from the Stock. Have clear parameters with regard to your performance expectations for a stock. Do you expect it to be a moderate but steady grower, to generate above-average returns through a rising dividend, or to be volatile with wide swings in price but well-above average long-term upside potential? These parameters will help you determine whether the stock is missing, meeting, or beating your expectations.

3. Evaluate a Company's Fundamentals Regularly. Periodically evaluate a company's fundamentals and analyze its business plan to be sure that they remain intact and on track. Keep an eye on the company's financial performance and be aware of significant events that could change its long-term prospects, such as a management change, a lawsuit, an acquisition, new competition, or the loss of a large customer.

4. Take a Closer Look If the Share Price Has Soared. If a company's share price soars to a level that is well above your expectations, it is time to review the situation and determine whether the price can be justified by company fundamentals. If not, the stock probably is a good sale candidate. If you still like the company, you may have a chance to repurchase its shares cheaper once they come back to earth.

5. Likewise, Reevaluate Laggards. If a company's share price performance is lagging that of other comparable companies and/or the market, take a second look to be sure that its fundamentals haven't deteriorated.

6. Sell to Rebalance your Portfolio. A disciplined investor generally will limit holdings in one stock to a maximum share of a portfolio, for example to no more than 10%. If a stock performs so well that it represents substantially more of your portfolio than your target, it would make sense to sell a portion of the position.

7. Switch to a Stock with Higher Return Potential. Ideally, you want to hold stocks that you believe have the highest return potential. Therefore, don't hesitate to sell a stock, even if you believe it could move higher, and replace it with one you are confident will perform even better.

Sources:

Cameron Huddleston, www.kiplinger.com, When to Sell a Stock: Kiplinger.com