It can be difficult to know when to sell a stock. Many investors do not like to sell a stock because they view that as admitting they made a mistake when they bought the stock. There are several reasons for selling a stock. I sold my position in several different stocks this year and I will share my reasons for doing so.
One reason to sell a stock is because the reason you bought the stock has changed. I bought a couple of stocks last year based on the fact that I though natural gas prices would rise. That proved to not be the case as natural gas got even cheaper. I sold the stocks because they were going down in value rapidly and it would take a major increase in the price of natural gas for them to have a chance to recover. If you have a 30% loss in a stock, it take a 42.9% gain to recover that loss. You don’t want to have to hope for a 42.9% gain just to get back to even, so it makes sense to sell a stock before it has such a big loss in value.
Another reason to sell a stock is because it has gotten too overvalued. If a stock has made you a lot of money, but now sports an extremely high P/E ratio it might be time to sell. If a stock has a much higher P/E ratio than comparable stocks you need to make sure there is a good reason for it being so highly valued.
One more reason to sell a stock is because it represents too much of your portfolio. If you try to keep a diverse portfolio of stocks you might want to sell a stock when it starts to represent too large a portion of your portfolio. I did sell part of my position in one of my stocks because it grown to be a much larger position than the other stocks in my portfolio.
Since I invest in dividend stocks for dividend income I will also sell a stock when it announces a dividend cut. Usually, when a company cuts its dividend it is having financial problems. Even if the company is cutting its dividend what might be considered a good reason, such as increasing its investment in research, the dividend cut means the stock no longer fits my portfolio. For my portfolio, I want stocks that have a history of consistently increasing their dividends.
A common rule of thumb is to sell a stock when it loses 10% of its value. This rule is ok, but it does have some drawbacks. One drawback is that the loss is sometimes for a temporary reason and you can see that the stock should quickly recover from the loss. Another drawback is that the only selling stocks when they lose 10% doesn’t get rid of stocks that don’t appreciate or lose just a small amount of their value. If the stock has rising dividends I might hold onto it even if the price doesn’t appreciate, but otherwise I don’t usually want to hold onto a stock that doesn’t appreciate in price.