When To Sell Your Stocks

by Dual Income No Kids on October 18, 2007 · 0 comments

Hello People,

Today’s posting takes a break from my rantings about America’s currency situation to address a more fundamental personal finance question – when to sell your stocks. Relatively speaking, there is lots of literature available on what kinds of stocks to buy, but less on when to sell your stocks. This is a shame because properly selling your stocks is just as tricky as properly picking what securities to buy.

So, here are some criteria you might use to decide to sell your stock.

1) Deterioration in Fundamentals
: By this I mean the negative changes in the economic conditions which contribute to your company’s profitability. To illustrate this with a example, lets say that you own shares in the Toll Brothers housing construction company (TOL). You might evaluate the current credit crunch and increasing foreclosure rates as evidence that the demand for single family homes has fundamentally shifted. You might then have a look at Toll Brothers accounting, perhaps check a couple of market reports and inform your selling decision accordingly.

2) Management Changes:
Sometimes the success of extraordinary business is built on the capabilities of exceptional individuals. A great example of this is Charles Schwab, the CEO of Schwab Inc. Charles built his company from a newsletter operation with two partners in 1963. But back in 2001, Charles stepped down to retire, leaving the company’s management in the hands of one of his lieutenants, David Pottruck. Pottruck unfortunately made some very bad decisions, resulting in a decline in the company’s stock by 60%. Schwab himself ultimately had to come out of retirement to return the company to profitability(clicky). So, the main point here is that adverse management changes can be a reason for selling your stock.

3) Declining Profitability: When the company starts to show declining profits or increasing losses, you might consider selling. The reason for this is that the best indicator of stock market prices is earnings. This bears repeating: the best indicator of stock prices is earnings. When good earnings come out, share prices are usually increased. If earnings decline, the price tends to fall. So, declining profitability is an additional reason you might consider selling.

Just to wrap this up, when you’re making the sell decision is important to exercise due diligence. Look at the company’s books, see what investor sentiment is, and poke around a bit to get a sense of the firm’s market. Above all, your decisions should be informed and rational!



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