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When Should You Sell your Stocks?




Whether you’re enjoying a stock price surge because of a bull run or suffering from losses because of price drops, one question is always certain to pop up: When’s the best time to sell your stocks?

During bullish periods, investors experiencing continuous price appreciation face the problem of “controlling” their greed. The stock price may already be up 20%, 50%, or even 100% but some traders still don’t want to sell because “I want more.”

Similarly, those already suffering from losses may still not be interested to sell because they fear the harsh reality that they have lost real money. They continue to believe that the stock price will return anyway to previous levels. That is possible but, in some cases, the loss could remain after several years or even decades.

So when’s a good time to sell?

For us, it’s a good time to sell stocks when (1) the Target Price has been reached; or (2) the expected Profit Percentage has been achieved; or (3) an acceptable level of loss has been determined. Let us explain these three scenarios.

1. Target Price reached

Many traders and investors buy stocks with a predetermined Target Price.

This Target Price value may be computed using financial valuation models (such as Dividend Discount Model, Free Cash Flow to Equity (FCFE), Free Cash Flow to the Firm (FCFF), or Price Multiples Model) and reported through equity research reports. Some investors, however, rely on rumored target prices which are abundant on Facebook or social media or relayed directly to them by brokers.

Either way, lock in the profit by selling a stock upon reaching your own Target Price.

For instance, I previously bought shares of Megaworld Corp. (MEG) at P2.00. My Target Price then was P5.00 — corresponding to a 150% increase. Upon hitting the price, I unloaded and sold the stock. MEG rose further to almost P6.00 but I did not regret it. Currently the stock is trading at around P4.00.

Some might argue that I “lost” the opportunity to make more but I discovered that the key to profitable and sustainable trades is managing expectations and managing greed.

2. Target Profit percentage met

During stock market bull runs, stock prices break out then continue to rise indefinitely. Another good time to sell stocks is when a Target Profit Percentage (vs. Target Price as explained in No. 1) is met.

For example, I previously owned DoubleDragon Properties (DD) shares which I bought for P20.00 each. My target profit upside then was 100%. This means once I’ve earned 100% return, I’m ok to sell the stock.

A few months later, the stock broke out and was trading above P40.00. My 100% target was already reached but back then, I honestly was unable to moderate my greed after seeing the price breakout. Despite already doubling my money and achieving my Target Profit Percentage, I still wanted to hold on to the stock.

DD further rose and peaked at P67.75 but weeks later, its stock price began to tumble. That’s when it hit me: I should stick to my own Target Profit Percentage. I then decided to sell DD at a lower price of P35.00, locking “only” a 75% profit. It’s below my 100% profit target, but I learned the value of discipline in the process.

3. Cutting losses

When stock prices are falling, investors usually overestimate the market by believing that prices will quickly return to previous profitable levels. That sometimes happen immediately but in most cases, it takes months or even years before prices bounce back. Investors then become ipit — stuck with a loss that they don’t want to realize.

Our advice: save yourself from misery by setting up a Stop-Loss Order or by selling a stock when your Target Loss Percentage is reached. This is actually just the reverse of No. 2 above, wherein instead of having a Target Profit Percentage, what you’re setting up is a “Target Loss Percentage.”

In my case, I bought AgriNurture Inc. (ANI) years ago at P15.50 per share. I had a Target Profit Percentage of 100%, but weeks later, the stock just kept on freefalling. At P12.50, my ANI shares already lost 20% of the value. That’s when I decided to sell ANI at a loss and to let go.

Yes, it’s tough to materialize the losses and to realize a 20% price reduction. But if you believe stock prices will not immediately return to profitable levels, it will be better to cash out and to transfer money to another stock that could make you money.

Case in point: ANI further fell to as low as P1.50 per share in 2015! That would have been a much bigger loss if I decided to hold on to the stock. ANI indeed managed to return to the P15.00 price level but only in 2018. That’s a long waiting period!

Another example: a friend of mine bought a stock right before the 1997 financial crisis. He decided to wait it out and held on to it for several years. Guess what? The stock’s price returned to its pre-crisis level only after 13 years!  That’s 13 years of waiting and that’s money that could have been invested somewhere else.

Conclusion

In summary, to profit in stocks, one should learn when to buy but equally important is when to get out.

If you’re winning, lock in the profit and don’t look back. Do not regret if ever you sold a stock whose price still rose consistently. At least you already pocketed actual money.

When you’re losing, cut your losses and move on. Better to realize the loss so you can transfer those funds to another stock that could possibly deliver profits.

In the end, you simply need to have an Exit Strategy. That’s as important as your stock selection and buying strategy.

Do you agree? Happy smart, stock investing!







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10 thoughts on “When Should You Sell your Stocks?”

  1. peter says:

    actually you make more money when you sell your stocks at a profit margin of 6%. stocks of some companies go up and down 6% in a matter of weeks. if you have a principal of P100,000 in stocks then that means P6,000 earnings in a month. that in itself is better than putting your money in a td or sa. you get 2%-4% per annum in a bank!

  2. cat says:

    I just learn about this stock investing, esp the cost averaging.
    My goal is to unload in 15-20 years.

    Did you invest similarly in a long-term?
    With your five years investing, can you say what they call “cost-averaging” can be felt?

    TIA

  3. johnnybravo says:

    finally, welcome to PMT! i am sick and tired of reading believers and non believers of GOD! hoping this is a jumpstart to talk again about various investments etc.

  4. Jay Castillo says:

    Thank you James for this very helpful article. Is there a way to setup an AUTOMATIC stop-loss order?

  5. randy says:

    what is the best way to choose stocks? what are the criteria you are looking for to invest on certain stocks?

    Thanks.

    Randy

  6. martin says:

    my portfolio is down about 20%, i just started buying almost 2 mos now and bought aggressively in the property sector. Of all the stocka I bought only BEL and LR are picking up. I am kinda nervous but deep down I know MEG, SLI etc will rebound soon.

  7. abie says:

    i got approve in in citiseconline and maybe next year ill start buying stocks.

  8. Geld says:

    I bought stocks of a large bank in the Netherlands during the crisis. Because the government wouldn’t let the bank go broke, stock prices are almost 300% up for that bank. I sold my stocks a few weeks ago, cashing in some nice profit :)

  9. vsantos says:

    i bought x and price dropped to 57percent should i sell it or wait for the price to go up.?

  10. darwin clark Buencamino says:

    Basically I can’t find answer on this blog if the best time is when Dollar Value is High or when Dollar Value is Low ? Could somebody mail to me if it is (When) it is better to give up my stocks…God Bless Us all…..

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