Deciding when to take profits on a winning stock can be an agonizing decision. Since no one knows exactly when a stock has hit its highest price, you should sell your stock when it makes sense for you. Factors to consider include your original investment objective, your personal tolerance for risk and whether anything about the company has changed. Tax considerations may also play a role in when you should sell your stock.
Price Target Reached
Successful investing takes discipline. When you first buy at stock, you should have a target price in mind at which you'd be comfortable selling the stock. This can be a dollar price, such as $50 per share, or a percentage gain, as in "I'll sell after it goes up 20 percent." There are many ways to develop a dollar price target, but most incorporate a combination of a company's projected earnings, growth rate and industry averages valuations.
One way to let your stock profits run while protecting against a decline is to enter a stop order. A stop order, also known as a "stop-loss," is an order designating a price at which you want to sell your stock if it starts going down. If the stock trades down to your stop price, it becomes a market order and trades at the next selling price. By using a stop order, you can avoid setting an arbitrary upside price target and sell your stock only when it is going down.
Fundamentals Have Changed
Stock prices generally follow a company's earnings. When a company is growing its profits, its stock price tends to go up as well. However, the converse is also true. A company with a long history of growing profits that suddenly has a hard time making money may not be a good bet. If the economic fundamentals of a company have changed, it might be a good time to sell the stock.
Stock investing can be an emotional thing. Some stocks are so volatile that they are gut-wrenching to watch, even if they are making money for you. If you don't have the stomach for the ups and downs of a particular stock, you may consider selling it just for personal reasons. You might also want to sell a stock if you don't have the time or desire to watch it closely, since stocks can move dramatically up or down in a short period of time.
While you shouldn't sell a stock simply for tax reasons, being smart about your capital gains can help your bottom line. Stocks that you hold for longer than a year receive a beneficial tax rate known as the capital gains tax rate. As of 2012, this rate was 15 percent for most investors, or as low as zero percent if you were in one of the lowest tax brackets. Short-term capital gains, or those held for one year or less, are taxed at your ordinary income rate, which could be as high as 35 percent in 2012. If you are considering selling a stock that is approaching the one-year barrier, you might want to wait a few days to save some additional money in taxes.
After receiving a Bachelor of Arts in English from UCLA, John Csiszar earned a Certified Financial Planner designation and served 18 years as an investment adviser. Csiszar has served as a technical writer for various financial firms and has extensive experience writing for online publications.