How to Sell Stocks

Good investors buy low and sell high. The question is: how low is low, but most importantly how high is high? When is a good time to sell a stock?

There are several market-driven reasons that could alert an investor to sell a stock. First of all, a warning sign is the company's fundamentals. For example, if the company's sales, cash flows etc. show signs of stress it may mean that something changed drastically in the company, which affects the performance of its stock. Typically, investors keep the stock until many investors panic and start selling the stock. This is wrong tactics because a market in panic does not allow for healthy investing. Investors should be ready to sell the stock, while they still realize a healthy profit.

Related to the company's fundamentals is when the company starts cutting or eliminating dividends. This may mean that the company faces financial difficulties that investors should pay close attention to.

Another warnings sign is when investors see the stock dropping by a certain percentage. In that case, they could instruct their broker to set a floor in the maximum 6% - 8% range depending on the volatility of the stock. The concept of this strategy is that investors may be afraid that the stock won't be able to support a market price above a certain level and any hint of bad news will lead the price to a plummet. Therefore, by setting a floor, they may not eliminate losses, but they certainly avoid big losses.

When a stock is overvalued it may mean that it does not reflect its true value and therefore it may be in a process for a fall. Investors should sell overvalued stocks and buy them again when they are corrected by the market trend. This strategy offers investors the opportunity to unload the overvalued stock, but it presupposes a good knowledge of the top and bottom of prices, which is a difficult feat.

Another reason to sell stocks is because investors need to rebalance their portfolio even if the current asset allocation seems to work perfectly. Portfolio weights should be aligned with the market realities, which, particularly in the stock exchanges, change at a very fast pace.

Finally, the fact that investors may hold some good, profitable stocks does not mean there are no other stocks that could provide a better opportunity for profit with lower risk. Investors should be constantly looking for a better deal in order to keep up with the changes in the market and realize a small or a large profit at any given time.