When to Sell a Winning Stock?
Dealing with a winning stock is a good problem to have. After all, you buy stocks with the expectation that they will go up and you will make a profit. But even when that happens, it can be difficult to tell what to do. You can sell part of your holding to recover your initial investment while you wait for the stock to go higher still. Or you can set a higher price target and hope your stock makes you even more money.
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Lock in Your Profit
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When you have a winning stock in your portfolio, one option is to sell enough of that stock to recoup your original investment and leave the rest in your portfolio. For instance, if you are lucky enough to have a stock that doubled over the course of a year, you could sell half of your shares and thereby recoup the money you originally put in. That way you still have half of your investment in place, and you can make additional money if the stock continues to go higher. If the stock turns around and begins to fall, you still have your original investment. You can sell a bit more than half your shares if you want to lock in your profits, or a bit less than half if you believe the stock is heading higher still.
Tax Considerations
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If you hold the stock in a taxable account, capital gain taxes can be an important consideration. The tax treatment for short-term vs. long-term capital gains is quite different, with long-term tax rates maxing out at 15 percent but short-term gains taxed at the individual's regular tax rate. If you are in the 10 or 15 percent income tax bracket, there is no tax on capital gains for 2011. If you can hold the stock for at least a year you can enjoy the lower long-term capital gains rate. If you sell before a year is up, you are subject to the higher short-term capital gains rate.
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Set a Price Target
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It is helpful to set a mental price target when you buy any stock. Once your stock reaches that appreciation point you should evaluate your holding and determine whether the stock remains a good value. Setting a price target also allows you to determine exactly how much you want to make. You could, for instance, buy a stock at $40 and set a mental price target of $60 or $70. If the stock reaches that price point, you would evaluate your holding and decide to sell some or all of the shares you own.
Would You Buy the Stock Today
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When you look at your stock portfolio and try to decide what to sell, it is always helpful to ask yourself if you would buy the stock today at its current price. If the answer to that question is no, then you might to sell that stock and lock in your profits. If you feel the stock is still a good buy at its current level of valuation, it might be a good idea to hang on to it for future growth.
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References
- Photo Credit Stock Market image by Paul Heasman from Fotolia.com
