Is it Time to Sell your favourite Shares?

The timing of your stock purchases and sales is frequently cited as a crucial factor in determining whether or not your investment will be profitable. Some financial gurus contend that the gain or loss on an investment is realised when a stock is bought; the buyer merely isn't aware of it until the stock is sold. However, the two are related since if you do not even sell at the right moment, purchasing at the best price won't provide anything in return.

Striking the right balance between fear and greed is necessary for determining when to sell a product. You might be able to avoid letting your emotions influence your decisions by employing a plan.

Why is it important to know the right time to buy and sell?

The fundamentals of the share market determine when to purchase and sell stocks. Buy cheap and sell high is the concept; if you buy a share for Rs.10 and resell it for Rs.20, you will have made a profit.

Any stock might have a short-term up or down day at any time for various reasons. The stock's underlying business may be unsound, and the firm will go bankrupt. Alternatively, research from an expert, a rumour about upcoming corporate activities, or general economic news might affect the stock prices too.

Some use cases and examples

Stock A, which is now trading at Rs.100 a share, is predicted to fall when the firm releases its annual profits report in a week. As a result, the investor short-sells share capital to the market while borrowing 100 stocks from a broker. In anticipation that the stock price will fall, the investor now “shorts” several shares of Stock A that he did not hold.

After the corporation releases its annual profits, a week later, the price of Stock A drops to Rs.90 per share. To cover his short position, the investor chooses to purchase 100 shares of Stock A for Rs.90 each. He then sells those shares back to the broker, completing a buy-to-cover order. Consequently, the investor makes money of Rs.10 per share, or Rs.1,000, on the whole transaction, before commissions and interest.

Steps to determine the right time to buy

If the stock in concern fulfils these checks, they might be suitable for you to buy.

1. Learn about and evaluate stocks

To specify whether a stock is a decent buy or a "goodbye," you need to research if you are into purchasing individual shares. And your success will depend on a lot of preliminary work.

You must know the organisation, financial position, offerings, and sector. Also, you need to read through its Securities and Exchange Commission filings (SEC). You will learn a lot about the stock you buy and its prospects.

2. Determine your investment capacity

You should always figure out how much you can spend before investing. The great news is that you can invest nearly any sum of money if you're just starting because consistency is necessary, not excessive purchases. Starting small is acceptable. 

3. Put your trade-in

Finally, it's time to make your first trade. With your broker agent, you can place an order using the stock's ticker symbol. Additionally, you must describe the type of order you intend to place: Limit or market orders:

4. Market orders: These allow you to make transactions at the best price in effect when your order has been submitted. You won't be able to select the cost at which you transact.

Limit order: Limit orders execute at the value you specify or more. Your order won't be processed till the price doesn’t reach the limit set by you or higher. You can select a margin requirement to be in effect for up to three months, though some brokers allow them to linger for longer.

5. Monitor your stock

It takes more than just buying stock to be a stockholder. You must also follow the company, keep an eye on quarterly or annual earnings, and stay up to date with the industry. As the company succeeds, you can also allocate additional money to the share. You can then expand your shareholding as your knowledge grows.

Steps to determine the right time to sell

Stocks that satisfy this checklist might be better off dropped from your portfolio.

1. Costs have risen too quickly and dramatically.

You might wish to record your gains and move on if the value of a share you own increases too quickly and unexpectedly. There are times when stock prices increase quickly for various reasons, such as speculation and inadequate liquidity. 

2. It meets your price goal

Savvy investors set a price objective when they first purchase a company, or at the very least a price range in which they would think about selling it. Every stock acquisition should be accompanied by an evaluation of the stock's value, with the current price preferably being markedly below this estimated value. 

3. Regression from the fundamentals

After deciding on a price target, it is crucial to monitor the development of the fundamental business in addition to the company's stock price. If the company's fundamentals deteriorate, selling may be a wise decision. 

4. A better chance presents itself

The advantage that might have been gained by choosing an alternative is known as the opportunity cost. Continually evaluate the prospective profits of a stock against another stock before making a purchase decision. 

5. Following a merger

The typical price at which a firm is acquired, or takeover premium, lies between 20 and 40 percent. The wisest action to take may be to sell a stock if an investor is fortunate enough to hold one that is ultimately purchased for a substantial premium. After the merger is completed, there may be benefits to holding onto the shares, such as the merged company's competitive position being significantly better than its constituent companies.

6. Following insolvency

This may seem common sense, given that a failed corporation is often worthless to its stockholders. Selling a loss-making asset might have its benefits as it could help offset potential capital gains and a tiny portion of ordinary income each year. Therefore, realisation of loss can be helpful for tax reasons.

The Bottom Line

Realising when to sell a stock is both art and science. Several factors, including those mentioned above, should be considered when determining whether stock gains have peaked or are inclined to maintain. Selling during a stock's upswing to lock in profits over time and selling into losses to prevent them from getting out of your hand are both sensible strategies.