Knowing when to sell a stock or equity is one of the hardest things about trading. Many traders understand picking up a stock for a bargain, when the price is low, for example, after a pullback or at fire sale prices. The other side of the coin, though, is when to sell. The natural and classic appeal of a buy and hold strategy helps the relatively unsophisticated investor to profit from keeping stocks in a portfolio, but this common method doesn't really give guidance on when to sell a stock or what is an acceptable sale price. Nobody really knows where a stock price might turn at any particular future time. However, there are some ways through which traders can know when to sell a stock, and do so decisively.
i. Make yield goals:
Traders who have a specific idea of how much gain they want will have a kind of prearranged idea of when to cash in gains from a stock. This is one way of deciding beforehand on when the stock should be sold.
ii. Consider profit taking:
Generally, experts recommend annual or periodic turnover in a buy and hold strategy. The idea is that, over time, the investor who has perhaps a dozen stocks cashes in the ones that have had explosive growth over a year and reinvests in cheap stocks for yet another big gain down the road. However, one should invest in the cheap stock only if the long term prospects of the stock looks promising.
iii. Avoid selling short or selling at a temporary loss:
Some traders sell stocks when they lose value due to weakness in the market, or experience something catastrophic like bankruptcy. However, if the stock is fundamentally strong, one should not panic and sell the stock at minor loss. If the market stabilizes, the good stocks have a high probability to rebound strongly to yield good returns.
iv. Sell in calm waters:
At times, due to adhoc trading activity, it becomes difficult for buy and sell orders to go through. Hanging orders can be problematic and jeopardize some of the stock's value. Thus, one should avoid selling stocks under such circumstances.
v. Know the results of selling when buyback is imminent:
Those who practice quick buys and sells on the same stocks often churn the portfolio and lose significant money to commissions. Also, due to complicated income tax rules, one might end up paying more tax on short term trades (shares bought and sold within a year) as compared to long term investment. This may increase the cost of trading and distort the plan.