How Does the Stock Market Work When You Sell?

Knowing when to sell your position is an important part of investing.

Knowing when to sell your position is an important part of investing.

Most stock investing discussions center around which stocks to buy. Hot stock picks, when to buy, and what's your growth strategy. Selling is often an afterthought, or a topic for experienced investors. But if you are buying stocks, chances are that you will sell someday, and becoming knowledgeable about the process will help you to be prepared when the time comes, whether tomorrow or in 30 years.

Process

The selling process is done with a fairly simple market sell order, which can be done through your online account or stockbroker. Theoretically, there is an actual buyer who will purchase these stocks, but for your concerns the trading house absorbs the sale and recompenses you at the current market price. There is a trading strategy known as "shorting," where an investor takes advantage of a high market price that she believes is likely to fall by selling borrowed shares of stock and then buying back the shares after the price decrease. In this situation, the deal is far from done at the sale, and the investor carefully monitors the market to know when to execute the buyback.

Returns

The decision as to when to make the sale will be largely based on the return on investment. There are two reasons you would sell your stock: either the price has risen enough and you would like to take out the profit, or the price has fallen and you want to cut your losses. Choosing exactly when to sell a stock is a precise art for the experienced investor. You want to hit a certain high before the price dips low again in order to maximize the returns or get out of it before losses escalate. Monitor stock prices through financial news outlets such as Bloomberg.

Taxes

Sometimes an investor will sell stock in order to create tax advantages. Returns on short-term stock investments are taxed by the U.S. government as regular income, and in a high tax bracket you will pay high taxes, as much as 35 percent. Long-term investments are subject to capital-gains taxes, which range from 0 percent for individuals in the 0 to 15 percent tax brackets to 15 percent for anything above that. If you sell shares with a high return, you can sell losing shares to offset the taxes. For example, if your long-term (over a year) returns are $2,800 and you have losses of $2,500, you'd only pay taxes on $300.

Next Steps

Many investors, especially those in for the long haul, will immediately reinvest their money after selling stock. They are always identifying purchase-worthy investments and after making the decision that it is no longer useful to own a certain stock, they will automatically sell it and buy a new security. The Motley Fool strongly recommends DRIPs, or dividend reinvestment programs. In a DRIP setup, you buy stock directly from a company and they reinvest your dividends for you, thereby avoiding commissions and trading fees.

About the Author

Jennifer Sable has been freelance writing since 2007. She has written copy for Pretty Me Maternity and frequently reports for 100 Ftse Index News in addition to other fashion and business websites. Mrs. Sable holds a finance degree from Yeshiva University and a Masters of Arts in public administration from New York University.

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