Frequently (Not) Asked Question - When To Sell A Stock?

Buying a stock is relatively easy, isn't it? You found that particular stock worthy enough to invest your hard-earned money into, and you bought it. Simple, right? That's because the hard part comes later, i.e. when to sell it! After all, to make money out of it, you need to sell that stock.

That's exactly where most of us get stuck, don't we? Let's simplify this for you by answering the not=so-frequently-asked questions around the right time to sell a stock.

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What should be the reasons behind selling a stock?

While there¡¯s no hard and fast rule as to when and why one needs to sell a stock, given the varying mindsets, financial position, market perception, risk appetite, etc., the reasons behind selling a stock can be categorized primarily into two categories: intrinsic and extrinsic reasons.

What can be the intrinsic reasons to sell a stock?

Intrinsic reasons are primarily connected with the basic nature of the associated thing, which in this case is stocks itself. You bought that ¡®tempting and promising¡¯ stock but what if it turns out to be a mistake? Just sell it instead of collecting huge losses even if it means incurring an initial small loss. Or if your stock¡¯s price has risen drastically, and you believe that it's purely because of speculation, rumors or a short squeeze, then its probably time to sell it whether in part or full.

Also Read: What Is Sensex And What Does It Mean For Your Investments

What about the time when the stock reaches your price target?

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When you bought the stock, you had a price target in mind, a target which once reached meant you'd sell that stock. So, if the stock has reached the target price, then you can consider selling it. If you believe in its further growth potential due to strong fundamentals, you can sell a part of its instead of the entire holding. This way, you keep the option of gaining further profits open for yourself.

Also Read: Explained: Why Indian Startups Are Catching The IPO Fever

What if the stock¡¯s fundamentals are deteriorating?

Many jump on the chance to sell their stock when its fundamentals begin deteriorating. But that's exactly where you need to pause and first understand the reasons behind it. These reasons can: slow earnings and/or revenue growth, increased competition, higher costs and lower margins or simply the valuation. You need to determine whether these seem to be temporary or permanent. If it still seems dicey, just go ahead with selling that stock.

What about the extrinsic reasons to sell the stock?

Extrinsic reasons are the external factors that make you sell the stock and not the stock¡¯s intrinsic reasons like the ones discussed above. Extrinsic reasons can be related to an investor's finances, lifestyle etc. For instance, if the investor wishes to rebalance the portfolio, stock selling can be a part of the strategy. Or another reason for selling can also be the investor wishing to book a loss for tax purposes.

As far as lifestyle reasons are concerned, there can be many, such as young investors can consider selling the stock to make down payment for the car. Or investors nearing retirement might sell their stocks to wind down their equity exposure.

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