Criteria for Selling a Stock
Deciding when to sell a stock is the most difficult decision for many investors. Oftentimes, the timing and execution of a stock sale will make the difference between a profit and a loss.
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Investment Plan
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A good investor will always have a plan for selling her stock before she even buys it. She'll have reasonable, analysis-derived upside targets for the stock, as well as downside stop loss points in case the investment doesn't pan out as planned.
Fundamental Reasons
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Money managers who make investment decisions based upon their analysis of company fundamentals, such as market share expansion and earnings growth, will seek to buy a stock when it is undervalued and sell when it is overvalued. Signs of overvalue include a rapidly increasing price-to-earnings ratio, price-to-sales ratio and deteriorating revenues.
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Technical Reasons
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Investors and traders who use technical analysis for making their investment decisions can rely on charts to tell them when to sell. It's oftentimes a good idea to sell a stock when it seems to be losing momentum upon reaching previous high prices, a condition known as weakening at resistance.
Taking Profits
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When to take a profit depends entirely on the perceptions, analytic processes, tax considerations and other factors affecting each individual investor. Whatever approach someone follows, it's important to let dispassionate analysis lead to a decision, as opposed to the emotions of greed or fear.
Taking Losses
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After acquiring shares of a company, it's a good idea to set a stop loss below your entry price to make sure you don't risk more than a certain percentage of your investment in the event the stock moves strongly against you. Common stop loss levels are 10 percent to 20 percent below the buy price.
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References
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