Investing in the financial markets can be quite a difficult endeavor, especially for beginners. Deciding when and what to buy can be a nerve-wracking experience. However, deciding when to sell is ever more difficult and this particular aspect of investing can trouble even the seasoned investors.
So how exactly should one go about cashing out of their investment?
This blog is dedicated to the few rules you should follow when you contemplate selling a particular investment, because unless a profit is realized, it can just as easily lose its value as it gained.
Pre-Determined Price Target
A huge part of strategy on buying a stock is to determine a price target or a range upon which selling should be considered. Each purchase should be an informed decision with substantial analysis backing the decision. Hence, determining a selling range such as when the price of the stock doubles is a worthy goal.
One of the most important activities an investor can invest in is to stay up to date with the company’s performance where the investor has purchased a stake. Everyone should monitor the performance of the companies they invest in. In the event that a company’s financial records indicate a decline, i.e. reduction in sales margin, disrupted cash flows, unhealthy liquidity levels, reduced market share, and other key operating fundamentals, the stock should be sold before the market price begins to reflect the deterioration of the company’s performance.
A Better Investment Opportunity
Quite often, investors are faced with the dilemma of opportunity costs as alternative investment opportunity presents itself. Accurately determining opportunity cost can be extremely difficult, but all investments should be compared with their alternatives. If another company with equally impressive growth prospects presents itself with an additional benefit of having an undervalued stock, then selling the previous investment in favor of the alternative would make sense.
Acquisitions and Mergers
When companies are taken over or undergo a merger, the purchasing company usually buys the company at a premium. If an investor owns the stake in a company, which is subject to a high premium takeover, they should immediately consider selling the shares. Moreover, takeovers are usually drawn out over a long period of time and the uncertainty behind a company can force a sell of the company’s shares, which would depreciate the value of the investment.
If an investor concludes that an error was committed during the analysis of a company’s performance or its price, then the investment should be sold off immediately, even if it means incurring a loss. Part of being human is to make mistakes. If a mistake is identified after an investment has been made, the investor should exercise due diligence and sell the investment and and does not depend on the erratic swings which the market is famous for.
Substantial Appreciation of Price
Since the market price of a company’s share is dependent upon market forces, i.e. demand and supply, the price of a share can dramatically increase in a short period of time without any real fundamental drivers behind the price movement.
The most optimum way to deal with such a situation is to sell off the investment immediately and in no circumstances consider it an affirmation for continued appreciation of the price. Such price movement can occur due to various external factors such as speculation, hype and mostly due to the last phase of the appreciation where the average investors jump on the wagon at the last moment. What happens next is, the price sharply declines and retraces most of the unhealthy gains that were made.
Remember that any sale which makes you a profit is a good sale. If the price continues to increase after you’ve decided to cash out, do not be tempted to jump back in. Never judge your selling decision based on what the peak of the bull market was, because most investors lose money trying to time the market.