Trading Stocks and Knowing When to Sell

If the stock consistently lags the market, that's not a good sign.

If the stock consistently lags the market, that's not a good sign.

Even a professional trader can get nervous about figuring when to sell a stock. If it's sunk below the purchase price, selling it loses money. If it's skyrocketed up, the trader has to decide whether to sell and turn a profit, or hang on and hope for a bigger profit later. However, some basic ground rules can help.

Too Much Stock

Diversifying your portfolio is a common defense against individual investments tanking. Having a variety of shares can keep your portfolio healthy even if one of your stocks crashes. Review your portfolio every quarter or so to see whether your selections are as balanced as you want. If you've been consistently buying a particular stock, it might make up a larger portion of your portfolio than it should. Selling off some of those shares can restore balance.

Faulty Fundamentals

In evaluating stock picks, it's always important to look at the company's fundamentals -- how much it's really worth. When a company's top management quits, or if the company's new product runs into legal problems, the fundamentals might no longer be sound. If you're concerned, check more deeply -- for example, by looking at the cash flow statement. When cash flow rises faster than income, or when inventory grows but sales don't, it might be time to sell.

Personal Rules

No two investors are exactly alike. You have your own goals and financial benchmarks for your portfolio -- perhaps to have a $60,000 net worth by the time you're 40, or to have steady dividend income year after year. Your investments should conform to that. Write down what your goals are, and review your current stock holdings. If they don't match your goals, consider selling some of them and looking for ones that fit better.

Facts, Not Feelings

Buying a stock gives you an emotional stake in it. Selling it for less than you think it's worth -- particularly if it's dropped in value -- is going to hurt. For successful investing, you have to look at facts -- such as company fundamentals, and whether the stock compares well to the market -- rather than at emotions. Do your research and draw up goals and rules for your investing. Sell when the rules say, not just when you're skittish.

About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.

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