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Before You Sell Your Stocks

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Warren Buffet, regarded as one of the world’s most influential investor, once said, “If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.” While this might seem like an extreme recommendation, many financial experts have asserted that the goal for stock investments should be to hold them for as long as possible.

The possibility of making money from stocks is hinged on two factors: buying at the right time and selling at the right time. For profit, it is important to execute both decisions correctly. Compared to selling, which is a difficult decision to make, buying of stocks is relatively easy.

The reason for this is because, if investor sell too early and the stock goes higher, they risk making inadequate profit. If they sell too late and the stock plunges, they miss out on opportunities to make more profit.

Why You Shouldn’t Sell Your Stocks.

Market downturns are great buying opportunities. On days when the stock market takes a beating, rather than mope about the loss, investors are encouraged to focus on what they could be buying. A market plunge or creates room for stocks to become cheaper.

The market is resilient. In the words of Tenpao Lee, a professor of economics at Niagara University, “In the short term, the stock market could fluctuate up and down, but in the long term, the stock market will always move up.”

When To Sell

When deciding to sell your stock, it is important to weigh the decision within two lenses: the intrinsic and extrinsic reasons. Intrinsic reasons are reasons that are related to the stock itself and/or the markets while the extrinsic reasons are related to the investor’s finances or lifestyle. Sometimes, however, the decision to sell may be triggered by a combination of the two factors.

Intrinsic Reasons

When a stock reaches your price target. Once a stock reaches a level that an investor had projected as their point to sell, then it is advisable to consider selling part, or all their position.

When a stock trades at a technical inflection point. When a stock trades near, and then breaks below a multiyear low, it often means additional losses in the horizon. In this case, it is encouraged to sell the stock as soon as the technical level is breached.

When a company’s fundamentals deteriorate. It is possible for a stock’s fundamentals to deteriorate for any number of reasons like slow earnings or revenue growth, increased competition, or reduction in valuation. In such cases, because it is difficult for the investor to determine whether the deterioration is temporary or permanent, it is advisable to sell and exit the position first, before re-evaluation.

Extrinsic Reasons to Sell

Financial reasons. One justifiable reason for an investor to sell their stocks is if they need cash to for a competing investment, such as real estate. Additionally, an investor might wish to sell a stock to book a loss for tax purposes. These financial reasons are potent ones to justify selling a stock.

Lifestyle reasons. Lifestyle changes also provide good reasons to sell a stock. For instance, a younger investor might sell part of or all their portfolio to put a down payment on a house, while parent investors may also sell stocks to finance their children’s education.

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