Understanding Equities - Question 76

When should I sell a stock?

This is a common question that has no simple answer. When to sell a stock depends upon your investment objectives. Many people buy a stock and have no idea when they plan to sell it. In other words, they really have no investment goal. What happens is: the stock goes up and they don't want to sell it because they'll have to pay capital gains tax on it. Then, the stock starts to drop below the purchase price, causing great concern. They don't want to sell the stock then because they’ll have a loss. So they decide to wait until it rises up to breakeven and then at that point they plan to sell it. What happens? The stock continues to drop below the lows and reaches new lows.

For fear of paying the tax on the capital gain, these investors have missed a profit opportunity and incurred a loss.

This loss could also have been avoided through the use of a stop loss order. You determine at the time you purchase a stock that if it drops 10-15% below the purchase price, it is automatically sold. So, by having a selling discipline in place, you will limit your loss. As stocks starts to rise and reach new highs, you keep reestablishing your selling discipline to 15% below the new high and when it reaches that new low, the stock is automatically sold. This is one method of locking in a profit and not riding a stock without a plan.