How to decide when to sell a stock?

Before you pull trigger on the sell order to sell the stock, few things you need to understand about the stock. Its always a difficult question in mind to decide when to sell the stock and not lose money. This tough situation always comes in front of successful trader in stock market.

Here are some clues that it is time to consider selling a profitable stock no matter what the analyst’s report says.

Deciding when to sell the stock is just as important as deciding which stocks to buy in the first place.

The refusal to sell, whether it’s due to unrealistic expectations, stubbornness, lack of interest or mere inattention, is the undoing of many an investor.

As a long-term investor, you don’t want to cash in every time your stock moves up a few dollars. Commissions and taxes would cut into your gain and, besides, you’d have to decide where to put the proceeds.

By the same token, you don’t want to bail out in a panic in the aftermath of a strong market decline.

Brokerage houses’ research departments are slow to issue sell signals unless a company faces serious problems. When analysts get uneasy about a stock, they often use phrases like “weak hold.” You should take that to mean, “Don’t buy any more shares and if you’ve got a profit, seriously consider selling.”

If you have a stock that had given a good returns and now you wonder whether you should book profits or wait for sign that the stock is about to reverse the direction.

Several typical warning signs can suggest you to sell the stock. 

The fundamentals change.

Whether you own a blue-chip stock or a company most people have never heard of, you need to follow the corporation’s prospects, its earnings progression and its business success as reflected in market share, unit sales growth and profit margin.

Annual reports, news stories, research updates from brokerage houses, and investment newsletters are fertile sources of such information, along with the references listed on pages 6 and 7.

If the company’s fundamentals start to weaken, it’s time to reconsider your investment. You will see this change in the key financial ratios of the company.

An example might be a fast-expanding retail chain whose sales per store, after rising for years, suddenly decline. Maybe the profit margin has slacked off after a series of consistent increases. These problems could signal that the business has peaked.

The dividend is cut.

The progression and security of its dividend are important to any stock’s prospects.

A dividend cut or signs that the dividend is “in trouble” meaning that analysts or creditors are quoted as saying they don’t think the company can maintain its payout to shareholders can undermine the stock price.

You reach your target price.

Many investors set specific price targets, both up and down, when they buy a stock; when the stock reaches the target, they sell.

A good target is to double or triple your money, or to limit your patience with a stock to a loss of 20%. Such guidelines can prompt you to take your gains in a timely fashion and to dump losers before the damage gets too painful.

You can set your sell level anywhere, perhaps arbitrarily choosing a price level that will double your money, for example. Once you’ve reached your objective, take the money.

If the goals you set are very conservative, you might miss some gains from time to time, but that’s better than holding on too long and falling victim.

If the company cuts the dividend, take a close look to get an idea of the company’s growth prospects in light of this cut.              

Selling the performing stock is a judgment call.

A dividend cut shows the company needs to conserve cash, typically to manage its debt. This move typically shows that management hasn’t been on top of finances and risk management.

If the cut comes because of broader economic conditions, you have to determine whether you believe this management team can steer the company through dangerous situation.

This cut is because of the company’s internal problems then you should decide to sell immediately 

Pay more attention if the company’s share price drops more than 10 percent but the company maintains the dividend.

This situation is another judgment call. First, look at the rest of the market.

Is the price down because of a sharp decline in the sector or broad market?

Is this company part of the sector causing all the trouble? For instance, if in early 2009 you held bank or real estate stocks that hadn’t cut their dividends, you may have expected them to soon follow their peers with a dividend cut.

In that case, sell. If the yield is way out of whack with the rest of the sector (off by, say, 4 percentage points), that may be another warning sign to get out.

On the other hand, if during a market downturn your stock  is part of a stronger, more defensive industry that continues to do business and should rally with the   economy, hold on for the ride and consider buying more.

Always do the fundamental analysis of the stock to get the long term returns.

If the share price drops and the company boosts the dividend payout, buy more shares.

If a company has experienced a serious setback and is losing market share, don’t let your emotions get in the way. Cut your losses, dump your shares, and find another place to invest your money.

You can take the simple step of setting up stop point in the mind.  Watch the stock listings and sell any stock that hits your stop point decided in the mind.