5 Things to check before you sell a stock

Given below are 5 things you need to ask yourself before pressing the sell button.

December 08, 2020 11:47 IST | India Infoline News Service
When asked how to be successful with stock market investing, the most common answer would be to buy and keep for the long term. However, very rarely to people define what long term really means. This makes us jittery and hesitant while making the decision to sell a stock. In many cases, investors make this decision without thinking through, at the spur of the moment. Anytime you make a wholesale shift in your asset allocation, it’s a challenging decision.There is a way to avoid this indecision. You can ask yourself certain questions that will compel you to think logically and rationally before making any move. Given below are 5 things you need to ask yourself before pressing the sell button.

1. Have the fundamentals of the stock changed?

Every stock investment you make should have a reason behind it. This is known as an investment thesis. As long as that remains intact, peripheral happenings should not matter.  However, if your rationale fails to materialize or the story changes, it can be a good reason for selling stock. Management incompetence, the depletion of growth opportunities, dwindling market share are a few reasons why selling a stock makes sense in this scenario.

2. Did you find a better opportunity?

Better investment opportunity means that you can get much higher returns on your money for the same amount of risk you take. This is quite often very hard to determine. You might sell your stock in a business that continues to grow way beyond your expectations, while you buy something where fundamentals deteriorate shortly after the purchase. It’s important to check your facts and thesis very thoroughly, and make sure that the new stock has the possibility to return several times the amount invested.

3. Has the stock run-up to unsustainable levels?

If the “market price of a stock is greater than the intrinsic value” of the stock, then it is overvalued. This is one of the key tenets of value investing. There are times that a stock price seems to be rising without any rhyme or season. The value of any share ultimately rests on the present value of the company's future cash flows. One of the key strategies in value, investing is finding stocks that are undervalued by the market. When this no longer holds true, the stock has reached its full value then it’s time to sell.If a company stock price has risen sharply without any anchor from fundamentals, it is a telling sign that a deep dive is around the corner.

4. Were your original reasons to buy the stock wrong?

There are times after a stock is purchased that you realize the facts do not support the supposed thesis of the original purchase. There are times that you could receive new information which will completely cancel out your initial theory about the stock. In that case, consider selling the stock for something else.  There’s no need to stick with a strategy once it appears wrong. Review new information constantly and adapt your investments accordingly.

5. Does your overall portfolio require rebalancing?

Sometimes a stock can grow to become a disproportionately large portion of your portfolio. You may find that your asset mix has become unfavorably skewed and is not aligned with your risk appetite. Perhaps, the mid-cap stocks have rallied too much, and/or large cap stocks have underperformed. Then the reason for selling the stock is less to do with the judging the company and more to do with sheltering your portfolio from unwanted risk.

The above given questions are ones you should ask yourself before divesting your stock. These are good, valid reasons to sell your stock. The bottom line is that there are some very good reasons to sell stocks; many long-term investors sell stocks frequently.Long-term investors should not fear occasional swings in the market. When the market dips or takes an unusual turn, that is the perfect time to review your portfolio, re-evaluate your investing strategy, and ask yourself some of the questions listed above.

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