When you are investing in equity, it is advisable to take a long term view but it doesn’t mean simply buy and forget. You must know when to sell your stocks. Following are the situations in which you must dump your stocks:
1. Change in Company’s Fundamentals: When you buy shares of a company, you do so because you are convinced about its growth prospects. And reasons for growth prospects can be due to its competitive advantage, quality management, upcoming projects, superior product mix or combination of all these. But if after the purchase you find that things have taken a turn for the worse, or reason of your investment is not materializing, you need to rethink. An adverse event may be threatening to put the business in a spot; offering superior quality products at lower price, key personnel may have left or projects may have hit a roadblock. In such situations, you should reassess the company’s outlook, and if found imperfect, you should sell the shares before they become rancid.
2. Price run up too high, too soon: If you have purchased shares of a company and its stock price increases very soon, let’s say by 30% in two or three weeks. It is enough to reaffirm your belief in the company, make you greedy. You convince yourself that you have hit upon a solid stock idea and that this sudden spike is just the beginning of a bigger rally. A dramatic appreciation can be due to reasons that have nothing to do with the company. It may be a random piece of news or market speculation. It would be better to pocket your gains and look for other opportunities, especially if the target price has been reached. If you are still certain about company’s prospects, you can always buy back at lower price.
3. Price drops below a threshold level: If you purchase shares of a company that declines to a level, then most people would say that it is temporary setback and the price will rise soon. You should ask yourself how much you are willing to lose on your investment and keep a threshold limit or floor, which should trigger a sale. This is known as ‘stop loss’. Instead of holding, learn from your mistakes and move on.
4. Opt for a better opportunity: Is there a chance to earn higher returns in another stock? If you are convinced about the potential of this opportunity, you could consider dumping underperforming stock. It would be better to get rid of the underachievers and seize the opportunity to recover some of the lost money and possibly make more. But never make the mistake of selling your winners to generate cash for this purchase.
5. Personal reasons: Apart from other reasons, personal consideration can also play a part in your decision to sell a stock. Over time, you may find that considering your risk appetite ( https://sfinance2.wordpress.com/2013/10/04/before-investing-evaluate-your-risk-appetite-and-risk-tolerance/ ) , your asset mix is skewed unfavorably. You can rebalance your portfolio.
You should review your portfolio from time to time, to have knowledge when and which stock is to be dumped.