How to Know When to Sell a Stock

By Inyoung Hwang · November 22, 2023 · 14 minute read

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How to Know When to Sell a Stock

Knowing the right time to sell a stock can be a complicated decision. There’s the desire to sell at a profit, or to sell in order to prevent a loss — and sometimes there’s a logic to selling at a loss for tax purposes.

There can also be times when selling a stock isn’t necessarily a good idea — like when the market is volatile, and an investor lets the market jitters interfere with their wider investing strategy. In any circumstance, it helps to know your rationale for when to sell a stock.

Key Points

•   Knowing when to sell stocks requires considering factors such as a company’s fundamentals, opportunity cost, valuation, personal needs, and tax implications.

•   Economic reports and earnings releases can affect stock prices, but there is no specific ideal time to sell.

•   Different sell order types, such as market sell, limit sell, stop-loss sell, and stop-limit sell, offer investors varying levels of control and execution.

•   Investors selling stock should consider how a sale aligns with their financial goals, risk tolerance, and time horizon.

•   Financial advisors and online brokerage platforms provide options for selling stocks, but costs and individual preferences should be considered.

When Is a Good Time to Sell Stocks?

There are a few ways to approach the question of when to sell stocks. Perhaps the most relevant answer is “when you need to.” That will depend on the individual investor, of course. But some investors, looking to generate a profit from their stock holdings, may also want to plan to sell stocks on certain dates, or during certain times of the day.

For example, earnings reports are usually released quarterly, and are often associated with movements in share price. This is often called “earnings season.” While there’s no way to know for sure how an earnings release will affect a stock’s price, more often than not, share prices gain or lose value in the wake of an earnings report.

As for specific times of the day — if you’re a more experienced trader, you may consider selling your shares around the open (9:30 am EST) or close (4 pm EST) of the stock market. Stock prices are most volatile around these times, so you may be able to capitalize on a sudden jump in price.

The point is not that there is a specific time period that’s ideal, or not ideal, when it comes to selling stocks. It’s best to familiarize yourself with the cadence of different economic reports (the jobs report, consumer confidence survey, interest rate changes, etc.), and learn what the impact of those data releases can be.

Once you have a sense of the literal ‘when’ of selling stocks, it’s up to you to judge the right time to make a move based on your rationale for why you want to do so.

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7 Reasons You Might Sell a Stock

There are several reasons that could prompt you to think about selling your stock.

1. When You No Longer Believe in the Company

When you bought shares of a certain company, you presumably did so because you believed that the company was promising and you wanted to invest in its stock, and/or that the share price was reasonable. But if you start to believe that the underlying fundamentals of the business are in decline, it might be time to sell the stock and reinvest those funds in a company with a better outlook.

There are many reasons you may lose faith in a stock’s underlying fundamentals. For example, the company may have declining profit margins or decreasing revenue, increased competition, new leadership taking the company in a different direction, or legal problems.

Part of the task here is differentiating what might be a short-term blip in the stock price due to a bad quarter or even a bad year, and what feels like it could be the start of a more sustained change within the business.

2. Due to Opportunity Cost

Every decision you make comes at the cost of some other decision you can’t make. When you spend your money on one thing, the tradeoff is that you cannot spend that money on something else.

The same goes for investing — for each stock you buy, you are doing so at the cost of not buying some other asset.

No matter the performance of the stock you’re currently holding, it might be worth evaluating to see if there could be a more profitable way to deploy those same dollars. Exchange-traded funds (ETFs) that provide easy access to other asset classes — like bonds or commodities — as well as newer markets like crypto, have also created competition to simply holding plain-vanilla company stocks.

This is easier said than done, however, because we are often emotionally invested in the stocks that we’ve already purchased. It may be a good idea to try and be as objective as possible during the evaluation and re-evaluation processes.

3. Because the Valuation Is High

Often, stocks are evaluated in terms of their price-to-earnings (P/E) ratios. The market price per share is on the top of the equation, and on the bottom of the equation is the earnings per share. This ratio allows investors to make an apples-to-apples comparison of the relative earnings at different companies.

The higher the number, the higher the price as compared to the earnings of that company. A P/E ratio alone might not tell you whether a stock is going to do well or poorly in the future. But when paired with other data, such as historical ratios for that same stock, or the earnings multiples of their competitors or a benchmark market, like the S&P 500 Index, it may be an indicator that the stock is currently overpriced and that it may be time to sell the stock.

A P/E ratio could increase due to one of two reasons: Because the price has increased without a corresponding increase in the expected earnings for that company, or because the earnings expectations have been lowered without a corresponding decrease in the price of the stock. Either of these scenarios tells us that there could be trouble for the stock on the horizon, though nothing’s a sure bet.

4. For Personal Reasons

Though not an analytical reason to sell, it is possible that you may need to sell a stock for personal reasons, such as needing a cash infusion in preparation for the home-buying process or some other purchase. If this is the case, you may want to consider a number of factors in choosing which stock to sell.

You may make the decision based purely on which stocks you feel have the worst forward-looking prospect for growth while keeping those that you feel have a better outlook.

5. Because of Taxes

Employing a tax-efficient investing strategy shouldn’t outweigh making decisions based on investment principles. Still, some people may take the rules of taxation into account when making decisions about which stocks to keep and which stocks to sell.

When purchased outside of a retirement account, gains on the sale of an investment like stock are subject to capital gains tax.

It may be possible to offset some capital gains with capital losses, which are triggered by selling stocks at a loss. If you’re considering this strategy, you may want to consult a tax professional. One strategy that some people use is tax-loss harvesting, where you purposely sell some investments at a loss in order to offset the tax consequences of gains in your portfolio.

6. To Rebalance a Portfolio

If you’re looking to make some tweaks to your investment strategy for one reason or another, you may want to sell some stocks as a part of a strategy to rebalance your portfolio. Investors are often encouraged to rebalance their portfolios often — but not too often — as market and economic conditions can and do change.

This typically involves taking a look at your desired asset allocation, thinking about your risk tolerance (and how it may have changed), and deciding how you may want to change the different asset classes that comprise your portfolio, if at all. Selling stocks would be involved in most rebalancing efforts.

7. Because You Made a Mistake

Finally, you may want to sell stocks if you simply made a mistake. You may have purchased shares of the wrong company, or bought a stock that is simply too risky, and are doing your due diligence and risk management in regards to your portfolio. If that’s the case, you can sell your stocks and reinvest the money elsewhere.

4 Reasons You Might Not Want to Sell a Stock

In addition to weighing possible reasons for selling a stock, there are counter arguments for holding onto your shares: e.g. having a knee-jerk reaction to the recent performance of that stock. There is, of course, a lot to think about when considering risk and investing, but you’ll need to know before buying any stocks that the markets are going to move — a lot.

1. Because a Stock Went Up

As mentioned, stock prices will go up at some point, and you may want to hold onto your stock in the hope that it will continue to grow. But that isn’t necessarily a good reason to try to time the market.

Even the experts cannot always buy at the bottom and sell at the top. There are no crystal balls, as they say. So even if a stock’s price is rising, you may want to have a few other reasons for not selling the stock.

2. Because a Stock Went Down

Conversely, stock prices will, at some point, go down. Again, it may be tempting to try and cut your losses before you accrue even bigger losses — assuming you think that the stock’s value will continue to plummet. But, again, it may be helpful to think longer-term rather than what’s happening today. Prices will, likely, rebound, and you may only lock your losses in by selling.

3. Because of an Economic Forecast

Economic forecasts come and go, and they change — a lot, and often. This is especially the case in the short term. Therefore, price changes may have as much to do with investor sentiment or outside forces (such as political or economic events or announcements) as they do with the health of the underlying company.

4. Because of Short-Term Reasons

There can be a million potential reasons that could spur you to sell your stocks in the short term. But many financial professionals will probably tell you that focusing on the longer term is a better idea, and not selling — i.e. using a classic buy-and-hold strategy — could lead to bigger returns over time.

So, barring some other reason, short-term issues or market fluctuations may not be a good reason to sell.

When to Sell Depends on You

Ultimately, whether you sell your stocks or not will boil down to your goals as an investor. That includes factors such as your investment style — are you looking at day trading, or employing a buy-and-hold strategy, for instance? — how much risk you’re willing to assume, and your overall time scale.

Many investors who are simply investing for retirement may very rarely sell stocks. Others, who are looking to turn a profit on a weekly or monthly basis, may sell much more frequently. It all depends on the individual. It’s more a matter of looking at what you’re hoping to generate from your investments, and how fast you’re hoping to generate it.

Risk, style, and how much time you have to do it are all critical variables.

Selling a Stock 101

These are the basic steps required to cash out and sell stocks:

1.    Whether by phone or via an online brokerage account platform, let your broker know which of your stock holdings you’d like to sell.

2.    Specify which order type (more on that below). This can determine at what price level your stock is sold.

3.    Fill out any other information your broker requires in order to initiate the sale. For instance, some accounts may have a “time in force” option, or when the order expires. Keep in mind, the trade date is different from the settlement date. It usually takes a couple of days for a trade to settle.

4.    Click “Sell” or “Submit Order.”

Different Sell Order Types

There are several different stock order types that can be useful in different situations.

Market Sell Order

This order type involves selling a stock immediately. The order will be executed without the investor specifying any price level to sell at. It’s important for investors to know however that because share prices are constantly shifting, they might not get the exact price they see on their stock-data feed. There may also be a difference due to delayed versus real-time stock quotes to consider as well.

Generally speaking, the advantage of using a market order is that your trade is likely to be executed quickly. That’s especially true for bigger or more popular stocks, which tend to be more liquid. But again: the biggest potential drawback is that you might not get the exact price you thought you were due to market volatility.

Limit Sell Order

Limit orders involve selling a stock at a specific price. For example, if you’re buying stocks, you can specify a price that you’re willing to pay — the trade will then be executed at that price, or lower.

If you’re selling stocks, the inverse is true — your stock will be sold at the specified price, or higher.

The upside to using limit orders is that they give investors some semblance of control by allowing them to name their price. The investor can then walk away, and let their brokerage handle the execution for them.

The downsides, though, include the fact that the trade may never execute if the specified price isn’t reached, and that using limit orders may take some practice and experience to properly execute.

Stop-Loss Sell Order

A stop-loss order is a level at which an automatic sell order kicks in. In other words, an investor specifies a price at which the broker should start selling, should the stock hit that level. This can also be referred to as a “sell-stop order.” But note that there are other types of stop-loss orders, such as buy-stop orders, and trailing stop-loss orders.

Stop-loss orders can be useful in that they can prevent investors from losing more than they’re comfortable with, or that they can afford to lose. They, as the name implies, are a very useful tool to prevent losses. But depending on overall market conditions, they can also work against an investor. If there’s a short-term drop in share prices, for instance, it’s possible that an investor could miss out on gains if share prices rebound in the medium or long term.

Stop-Limit Sell Order

A stop-limit sell order is an order that’s executed if your stock’s price drops to a certain price, but only if the shares can be sold at or above the limit price specified. They are, in effect, a sort of bridge between stop and limit orders. These types of orders can help investors dodge the risk that a stop order executed at an unexpected price, giving them more control over the price at which a sell order will execute.

Different Ways to Sell Stocks

There are desktop platforms and mobile phone apps that offer brokerage services. These are likely the most common platforms individual or retail investors use to currently buy or sell stocks. However, another option is through a financial advisor.

Financial advisors are professionals who have been entrusted to handle certain financial responsibilities and you can send them a stock sale order to execute. They can do a number of other things for you, too, including proffer advice and help you formulate an investing strategy. But there are costs to using financial advisors, so it may not be worth it, depending on how involved in the markets you are.

The Takeaway

Knowing when to sell stocks is not an intuitive thing — there are a lot of times when it may be a good idea to sell your stocks, and others when it’s not. For example, if you’ve lost faith in a company, need a cash infusion, or are doing some portfolio rebalancing, then it may be a good time to sell stock.

On the other hand, if you’re unnerved that your stock’s price fell after a bad earnings report, you may want to hold on and let things play out. It’s difficult, and is a true test of your risk tolerance. But over time, it should become easier and more natural as you gain experience as an investor.

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How can you tell when to sell a stock?

There’s no exact science, and determining whether it’s a good time to sell a stock will come down to the individual investor’s preference, risk tolerance, and time horizon. However, you can also keep an eye on a stock’s valuation, consider your opportunity costs, and weigh other factors in order to make a decision.

Should you ever sell stocks when they’re down?

You can sell stocks when they lose value for any number of reasons, but it’s likely best practice to make sure you’re doing so as a part of an overall investing strategy, e.g. tax-loss harvesting, and not simply because you’re making an emotional or irrational decision based on current market conditions.

How much profit do I need before I sell a stock?

There’s no exact science or answer to determine how much of a return you’d need to see before you sell a stock. That’s up to the specific investor, and there may be times when you actually generate a negative return when selling a stock.

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