Hint : Not as soon as it goes up!
You did it! You have a stock which is giving you handsome profits and your fingers are itching to press the sell button. Just one click and all that unrealized profit can come into your Demat account. But should you sell or should you hold the stock? Before we go into the reasons to sell a stock, I want to mention one reason not to sell your Stock – because my Stock has gone up a lot! Most multibaggers are created by holding good quality companies for a long time and there is no reason to sell if your stock is still a good quality stock with decent valuations.
Here are the reasons to sell a stock :
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You need money
There is no better reason than this to sell a stock. Maybe you want to buy a car, renovate your home or had an emergency. The most important reason to sell a stock is get money when you really need it. There is no point in having a big portfolio and not use the money for emergency or luxuries which make you happy.
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You find a better opportunity
Stock Market is like a buffet where many options are available at the same time. So, if you have a good stock on your radar which you want to own and you have done proper research on the Stock (don’t know about Stock analysis – This can help!) then it might be a good idea to sell some of your profit making stock and buy the new stock. However, make sure that you have good conviction that the new stock is a better opportunity than your old stock otherwise you were better off holding your old stock!
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You want to diversify
You generally want to keep a well diversified portfolio to ensure that your portfolio doesn’t depend entirely on a handful of companies. Suppose you bought a stock equivalent to 5% of your portfolio. But after a rally, that same stock now represents almost 20% of your portfolio. This might be a good time to re-balance your portfolio. Giving one single stock very high percentage of your overall portfolio is simply playing with fire, it might not end well.
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Your stock is extremely overvalued
When you bought your stock you did a proper analysis and found that the company which you were buying was a great company available at a good price (decent company valuations). But for some reason, your stock has become the talk of the town and everyone is Euphoric to buy that share due to which the once decent valuations of the company are now stretched to extremely high valuations. Such high valuations are rarely sustainable in the Stock Market and can lead to a significant correction in the Stock price. In such a scenario, you are better off selling some of your Stock holdings.
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Remember why you bought the Stock in the first place
When you first bought the Stock, there must have been a story in mind. Maybe the company was showing good quarterly results, launching new products, giving out good dividends, etc. Or maybe the company was doing something revolutionary which no other company was doing. Before you sell the stock ask yourself this – has the story now changed? If the story is still intact then do not even think about selling the stock. However, if the story has changed, growth period is coming to an end or company fundamentals have degraded then it might be a good idea to sell.
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Your trade has hit it’s target
You bought your stock as a short term trade and never had the intention of holding it for a long term. So, if it hits your target then congratulations! Sell your shares and get that sweet profit. But make sure that emotions do not start to influence your decision making. Many people tend to switch between trading and long term investing just because they feel like it. DO NOT be that person!
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Fraud by company promoters
All company stocks rely on the faith which you have on the company promoters. In fact, every business relies on trust and goodwill of the company. This trust is the simple reason why TATA group is considered to be a favourite amongst investors because of the reputation which the management has created over the years.
Any dent to this trust in the form of frauds, scam, mismanagement, etc. is taken very seriously by investors especially big funds. Such stocks should be sold regardless of whether your are making a profit or loss if there is a loss of trust.
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You stock is relentlessly falling
Maybe there is absolutely nothing wrong with the your share. Maybe everything looks good on paper yet the stock is falling relentlessly. Always keep a number below which you WILL sell the stock. Think of it as a Stop loss for long term investments.
e.g. “I will sell my Stock if it falls more than 20%/30%/35% from it’s highs”. Choose a number and stick with it. Many company frauds come into light long after insiders know this information. You do not want to be the last person to hold onto a worthless stock. Protection of your capital is of utmost priority in the Stock Market.
And if your decision of selling the Stock turns out to be wrong and the selloff turned out to be a kneejerk reaction (20-30% corrections are generally not kneejerk reactions) then you can easily re-enter the stock. It is okay to be wrong in the Stock Market but it is unacceptable to lose your capital.
If you think that every stock should be held forever, then this article will change your mind!
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DISCLAIMER : I am not for or against any company. Company names are mentioned to provide examples to the readers.
Contact me at investmentabshuru@gmail.com
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