 Personal Finance PowerPoint Presentation, selling stock. Prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia. When to sell a stock, which you can find online. Take a look at the references, resources, continue your research from there. This is by Sham Gad, updated March 12, 2022. In prior presentations, we've been taking a look at investment goals, investment strategies, investment tools, keeping in mind the two main categories of investments. Fixed income, like bonds, the equities, like stocks. Using tools such as, for example, mutual funds and ETFs often being used by individual investors. But we can also be purchasing and selling individual bonds and stocks themselves. We're focused here on the stock side of things and specifically when to sell a stock. Theoretically, the ability to make money on stocks involves two key decisions. Buying at the right time, selling at the right time. Buy low, sell high, that's my motto. So make a profit, you have to execute both of these decisions correctly. Buying a stock is relatively easy, but selling it is usually a more difficult decision to make. So often times when we're investing, we've got the money we're investing and ready to do so and purchase in the stock is fairly easy process. Selling it can be a little bit more difficult to determine when we should sell it, what's the strategy we should be using, which stock should we be selling. So if you sell too early and the stock goes higher, you risk leaving gains on the table. If you sell too late and the stock plunges, you've probably missed your opportunity. What's an investor to do? So note that oftentimes individual investors are often theirs for the kind of like the long term. So if you're like saving for retirement, then you might not have as much difficulty because you might be using say mutual funds, for example ETFs and putting your money in for the long haul. And then you're going to be looking at these concerns more often at the point in time that you've got to withdraw. But especially if you're trying to get more of a short term kind of gains, when should you enter into the market? When should you remove yourself? Oftentimes you would like to enter the market when there's a dip or something like that. So you could get a lower price to go in and then hopefully, and if you're in a long term perspective, then you might write out more of a long term perspective. But if you're trying to get more of a short term gains, then you're playing the ups and downs, the smaller peaks and troughs in the market. And obviously you're going to have to agonize a little bit more over what's the right time to be buying, what's the right time to be selling, trying to find the golden rule, buy low, sell high, which is actually hard to do in practice of course. So many investors have trouble selling a stock and sometimes the reason is rooted in the innate human tendency toward greed. However, there are strategies that you can use to identify when it is and isn't at good time to sell. Selling a stock is hard. Here's an all too common scenario. So just realize obviously whenever you buy and sell stocks, no one is a genius. I mean, no one can read the market perfectly. So you're going to make bad decisions. So you've got to do your research the best you can, try not to make your trades based on panic, but logical decisions and then whatever happens, happens. You make some bad decisions as long as you made it consciously and not out of fear, then you just keep learning. So you buy shares of stocks at $25 with the intention of selling it if it reaches $30. The stock hits $30 and you decide to hold out for a couple more dollars in gain. The stock reaches $32 and greed overcomes rationality. Suddenly the stock price drops to $29. You tell yourself to just wait until it hits 30 again. This never happens. You finally succumb to frustration and sell at a loss when it hits $23. So clearly when things are on the upturn, our gut starts to say, hey, look, things are going good. Why would I sell now? I'm going to miss out on the future gains and notice that often comes out of fear. Well, if I sell now, I'm going to be silly. People are going to think I'm silly because I sold it before. Well, the thing was spiking, but then if it goes back down, if it goes under, then we often sell at the low point, like the $23 in this example, once again, out of fear. Well, now we're on a downward trend. I've got to sell it at this point. It's going to look dumb if I don't sell it. I'm just wasting my money and time. So what you want to do is try to say a rational goal that's not based on fear and then try to execute based on that. So in this scenario, it could be said that greed and emotion have overcome rational judgment. The loss was $2 a share, but you actually might have made a profit of $7 when the stock hit its high. This paper losses might be better ignored than agonizing over. But the real question is the investor's reason for selling or not selling to remove human nature from the equation in the future. Consider using a limit order, which will automatically sell the stock when it reaches your target price. So if you have a strategy that you think is sound going into it and you think that you might not be able to hold to that strategy, you might then make it execute automatically. So you won't even have to watch that stock go up and down. You'll get a notice when your sell order is placed. When should you sell? In general, there are some intrinsic reasons to sell a stock, i.e. reasons that are related to the stock itself and or the markets. So clearly sometimes you might be saying, well, I have to sell because I need the money or I need to sell because it's under like an IRA or something. And I've got to take this or something like that. But clearly if you're trying to play the market, then you're trying to say, when should I sell in order to maximize my profits? And that's a different question. So in addition, the investors may also have extrinsic reasons to sell by extrinsic. We mean reasons that are related to the investor's finances or lifestyle. Occasionally, the sell decision may be triggered by a combination of intrinsic and extrinsic factors. Let's look at some intrinsic reasons or factors first. Intrinsic reasons to sell. So when the initial buying decision was a mistake. So most experienced investors may have encountered this situation at some point. You've watched this stock or more likely a meme stock make phenomenal gains on a daily basis. So you finally decide to suspend your disbelief and recklessly put in a sizable buy order for the stocks. And now we put in money. We don't think it's going to. But just again, this is another act when you're trying to follow the market. You start to get moved by things that are emotional. It looks like an emotional thing here. This doesn't make any sense to me. But look, this move is happening. Whatever. I'm going to go out. I'd be stupid not to go into it at this point in time. But as soon as you do so, you realize that you've probably made a mistake. The best course of action in this case is to sell the stock. Even if it means taking a small loss on the trade and to avoid making the same mistake in the future. Resist the temptation to chase hot stocks that are running on fumes as they may burn you financially. So you would like to make decisions on sound financial or have some rationale other than this is a hot stock kind of thing generally. So when the price rises dramatically selling a stock merely because it has risen dramatically in price isn't always the best course of action. So obviously if the price goes up, you're going to have an incentive to want to sell it at that point and take on your gains. So in some cases, the price gains may be justified by the company's underlying fundamentals. For example, it sells and or earnings may be growing faster than investors expectations. But in other cases, the price may have posted exponential gains purely on speculation or due to other reasons such as taking rumors or a short squeeze. In such cases, the investor would be well served by doing some research to try and ascertain the reasons for the stock gains. And depending on the findings, either sell the full position or sell part of the position and put in a stop order to sell the balance if it trades below a certain price. So if it spikes up, you might say, OK, why did it spike? What should I do at this point in time? You might do the research and say, well, do you think this is something that's reflected in the value of the stock that's going to be sustainable or not? And then you might say, well, if I might take some money out now, I might try to put a stop in case it starts to go back down. And if I see that decrease happening, then I sell it and still realize some of the gains at that point in time. If it keeps on spiking, then we keep on going with the ride possibly. So the more that the stock short term gains contribute to your overall portfolio, the more critical the sell decision. For example, if you bought 1,000 shares of a biotech stock at $5 per share when your total portfolio was worth $25,000, that stock constituted 20% of your portfolio. If after three months of that biotech stock, a quarter drop dropped on promising trial results. Well, while the rest of your portfolio is unchanged, it would now account for 50% of your portfolio. In this situation, it might be prudent to sell some of your shares and book part of the profits. So now in that case, of course, because that stock spiked and it was already a substantial part of your portfolio. Now you're heavily invested. You're doing good because you've got to gain on it. But now you're heavily invested in one company. You're not as diversified. So that would be another reason you would think to possibly readjust your position. When stock reaches your price target, have you ever owned a stock that has been down in the dumps for years, but suddenly has a new lease on life and is now trading at your original entry price? If you promised yourself that you would sell the stock if it ever came back to your buy price, dump it without hesitation. You shouldn't have been holding on to that loser for so long in the first place, but that's a subject for another time. Similarly, if a stock reaches a level that is traded at all too briefly in the past and you always thought that you would sell if it reached that price again, or would consider selling part of your position rather than regret another missed opportunity then why not sell all of it because of the next point? So when a stock trades at a technical inflection point, so when a stock trades near and then breaks below a multi-year low, it often pretends additional losses ahead. In this case, it may make sense to sell the stock as soon as the technical level is breached on the downside. Likewise, if a stock breaks through a key resistance level on the upside, it may signal more signs and a higher trading range for the stock, which means it might be advisable to sell part of the position rather than all of it. Technical analysis always watch stock price charge closely to identify other signals such as moving average crossovers. So when the fundamentals deteriorate, a stock's fundamentals may deteriorate when any number of reasons. Now you're looking at the fundamentals behind the stocks, looking at the financials for example. And that could happen because slowing earnings and or revenue growth, increased competition, higher costs and lower margins, or simply valuation, the first such signal of deteriorating fundamentals may come from a company's quarterly earnings reports or sometimes from guidance ahead of an earnings report. So obviously we're looking at stocks, the investing in the stock is based in part on their earning potential. So if they're not hitting their goals, that would not be good, you would think, for the stock price. Market reaction to negative news from a company such as an earnings miss or lowered forward guidance tends to be swift and unequivocal with stock likely to plunge by double digits. In such cases, the investor needs to determine whether the deterioration in the stock's fundamentals is temporary or permanent. Since this is no easy task, it might be preferable to sell and exit the position first, then evaluate if it should be bought back later. When a rival company issues bad news, often the problems affecting a specific sector may be highlighted when a bellwether company in that sector reports an earnings miss. So if you're looking at a related company to the company that you're running in, that might be a signal that the stock that you're holding could have similar issues because they're in the same sector. So if you own stock in a company that is that in the sector, consider selling it unless you are quite confident that your stock will not be affected by the sector's woes. When the market looks wobbly, this is no easy task and is certainly not a suggestion to indulge in market timing. But there are times when the broad market looks overextended. So, you know, you don't want to be thinking, well, what's the market like all the time and get to end the weeds on it. But on the broad basis, you're going to look at the the tropes and, you know, the ebbs and flow in the market overall. And you get a sense of the overall direction. At such times, it makes sense to to cull the weaker names in your portfolio. In a financial earthquake, stocks of companies that have a heavy debt burden or a weak financial position might be the first to collapse. So notice when you're looking at stocks, oftentimes companies that are trying to grow are going to leverage their company. They're going to take on a lot more debt because they're trying to finance the purchase of equipment and so on so they can grow faster, which works great if the economy is doing well. But if there's a downturn in the economy, they're not going to be able to finance as well. And if they've over leveraged, they don't have the strong cash position that's going to be not bad. I mean, that's going to be bad in a downturn. Extrinsic reasons to sell. Now we're looking at the extrinsic reasons, financial reasons. So obviously, if you need the money, this can include any number of reasons pertaining to the investors finances. For instance, a stock may have gained so much in proportion to the rest of the portfolio as in the example of the biotech stock mentioned earlier that the investor may need to rebalance it to bring it back in balance. So you might be saying, okay, a stock did so well that now I'm way too heavily weighted in that one area. So you might want to sell in order to diversify. Or the investor might wish to sell a stock to book a loss for tax purposes. So tax planning plays a huge and other role in this whole thing. Another reason to sell stock could be because the investor needs to cash to deploy in a competing investment such as real estate. Such financial reasons are pretty potent ones to justify selling a stock. Lifestyle reasons. Lifestyle changes also present good reasons for selling a stock. Younger investors might consider selling all or part of their portfolio to make a down payment on a house or buy a car. Investors nearing retirement might sell stocks to wind down the equity part of their portfolios and reduce the risk exposure. Parents may also sell stocks in tax-advantaged plans earmarked for specific purposes such as their children's education. Combination of reasons. In some cases the decision to sell a stock or stocks may be precipitated by a combination of intrinsic and extrinsic factors. For example, let's say you lose your job because of corporate restructuring and are a few years from retirement. You have been uneasy about the market's elevated levels and historically high valuation. So you're saying, hey, the market looks like it's been riding high for quite some time overvalued possibly overheating for various reasons. But you previously felt a little inclination to act upon it. Now, however, you would like to conserve your capital with the intention of using it in the business that you always dreamed of starting. In this case, your sell decision is justified by intrinsic reasons, your lifestyle change, as well as extrinsic ones, market elevated levels, valuation. So if the price of a stock that I hold plunges, should I sell it or buy more to average down? So now you got the stock went down in price. It really depends on a number of factors such as the kind of stock, your risk tolerance and investment objectives amount of investment capital, et cetera. So if a stock goes down, you can react two ways, you know, typical two ways of acting. You might be saying, well, now I want to cut my losses at this point, or you might be saying, I'm going to double down on it because it's going to go, I'm going to regain, I'm going to go back into it. And obviously that'll be dependent on the circumstances in which case, which one would be the way to go. If the stock is speculative one and plunging because of a permanent change in its outlook that it might be advisable to sell it. But if it is a blue chip that has suffered a temporary setback, then averaging down is a strategy worth considering. I like the long term perspective for a stock in my portfolio, but I am nervous that it might fall in the short term. Is there an alternative to protect my downside instead of selling it? Consider a put option, which gives you the right to sell the stock at a specific price for a period of time. Put options aren't cheap, but neither is insurance. Can I sell a stock on the same day when I bought it? Yes, as long as you don't make a habit of it, otherwise you might be considered a day trader. Day trading can result in substantial losses and is best left to experienced well capitalized traders. When I sell a stock after how many days will I receive the proceeds? For most stocks, the standard period to receive the proceeds of a stock sale is two days. This is also known as the T plus two settlement period. So what's the bottom line? Any sale that results in profit is a good sale by low sell high, particularly if the reasoning behind it is sound. When a sale results in a loss with an understanding of why that loss occurred, it too may be considered a good sale. Selling is a poor decision only when it is dictated by emotion instead of data and analysis. And again, there's high emotion when you're watching the prices going up and down. So you want to be trying to make your decisions not based on just emotions going either way out of basically fear. Of missing the game, fear of missing, of not cutting the losses, but some kind of rational decision making process. So the key thing to remember is that once the sell decision has been made on the basis of thorough and rational research, the investor should neither look back nor experience sellers remorse. And again, this is typical with any kind of decision making process. Oftentimes our mind is in the rear of your mirror looking at the last decision analyzing it for no good reason. For the good decision just agonizing over it. We want to learn the lessons of whatever the past decisions are and then apply the principles to the current positions.