Six Tips on Deciding when to Trade and when to Stick it Out
Investing in the stock market is full of ups and downs. A company may be your best performing stock one year and your worst performing stock the next year. Knowing when to trade an investment is an important consideration for any investor. Here are six tips to help you decide when to sell a stock and when to hold onto your investment.
1. The business has fundamentally changed
When you buy a stock, you are not just buying a piece of paper; you are buying a stake in the company. As a shareholder and an owner of the company, you should be aware of the current state of the business and any factors that may influence or affect the long-term prospects of the business. Did the CEO of the company unexpectedly resign? Has a major customer recently left for a competitor? These are all factors that may have a material impact on the business and that may cause you to consider trading your shares.
2. Your investment thesis remains in tact
Every stock experiences day-to-day price fluctuation or unexpected news that might negatively impact the performance of the stock. When evaluating these events, you should consider whether or not the growth story for the company has changed. Are the events that led to a dip in performance a one-off event or are they indicative of potentially troubling long-term problems? If the events have not changed your outlook or your reasons for purchasing the stock, you should consider sticking with the investment.
3. Your financial goals change
In matters of money and markets, it is important to be aware of your financial goals and new opportunities that may help you reach these goals. As your financial goals change, your investment strategy should change to accommodate your new goals. If you want more income generation from your portfolio, you may consider selling growth stocks to invest in dividend stocks. If you want more stability in your returns, you may switch from volatile small capitalization companies to more stable large capitalization companies.
4. Tax implications
If you hold your investments outside of a tax-deferred or tax-free account, you are required to pay taxes on the dividends and capital gains. The taxes that you pay on your capital gains typically depend on the length of time that you have held the stock. If you hold the stock for more than a year when you sell, you pay a tax of 15% on the capital gains. If you hold the stock for under a year, you are taxed at your regular income rate. Taxes can have an impact on your total expected return and should be an important consideration when deciding whether to trade or hold a stock.
5. There are more attractive investments and opportunities for your money
Even if you are a long-term buy and hold investor, new investment opportunities can arise that may be better than your current allocation of stocks. Perhaps a new company is selling disruptive technology that is likely to revolutionize the marketplace or a biotechnology company recently got a drug approved that will cure a common illness. If new opportunities emerge that you believe have the potential to beat the market you may want to consider trading your stocks to fund new purchases.
6. Performance relative to peers and the market
The performance of any individual company does not exist in a vacuum. There are a myriad of factors that impact a stock’s performance. A company’s share price may be down twenty percent, yet the company may be outperforming industry peers and the general market. Context is an important consideration that can help guide the decision to sell or to hold your investments.
The decision to trade or to hold onto your investments is never easy. There are many factors that can affect a stock’s performance. As an investor, it is important to be prudent and to consider your financial goals and how your investments are working to help you reach these goals when making the decision to sell or to hold.
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Category: Investing
