When to Sell a Stock!

 

The most confusing question for an investor is “When to Sell a Stock.” It is actually not the most discussed topic. Even brokerages suggest when to Buy a Stock with a Target Price but what if the Target Price is Not Achieved in the said Time Frame and what if the investor wants to Sell before the said Target Price or Time Frame. What does the investor do in that case?

Let me list down the reasons why an Investor should Sell a Stock. The obvious reason to Sell a Stock would be that the Target Price given by a brokerage is achieved. The below listed reasons are applicable for Long-Term Investors especially investing in Mid-Caps/Small-Caps.

1.       Huge Fundamental Change in the Company: A Fundamental Change would mean that there is a Change in your Conviction that you had set when you first bought the company. For example: We had bought IEX around 160. On June 2nd, 2023 circular from Ministry of Power directed CERC to undertake the process of Consultation & Implementation of Market Coupling. This means that there will be a government entity which will do the price discovery based on which power will be dispatched on platforms like IEX, HPX and PTIX. This would dry up volumes. Currently, IEX is the most trusted platform for electricity spot price determination in India, which is its business moat. Now as price discovery will be done by the government, IEX will merely remain a platform to match bids with asks. There is still confusion on what exactly does the CERC mean by this which puts revenues and profitability in question of IEX which led us to sell the stock at a loss at Rs. 120. Till said date, we haven’t bought back the stock.

So even if there is a loss in a stock, but there is change in your conviction of the stock or business moat of the company, it is better to get out of the stock rather than deal with the volatility of the stock price.

2.       When in Need of Cash: If you are in Need of Cash, its better to first understand at what Stage the Stock Market is. If the Stock Market is near the highs and you have a lot of profitable positions, it’s better to book profit in this case. If the Stock Market is near the lows, it’s better to sell off the stocks in which you have lowest confidence or recently bought stocks. It’s always better to keep stocks that you have highest confidence in whether they are in profit/loss. The other option would be reduce the size in that particular position. For example: You have 1000 quantity of a stock, you can reduce it to 500 to generate cash.

3.       Markets in Consolidation Phase: If the Stock Market Scenario is near to the All-Time Highs and has remained near those levels for a significant period of time and it is likely that some kind of correction in the overall markets is expected, it’s better to keep some kind of cash to grab new opportunities that might come when the markets fall. You can either add in new cash or you can book profits in stocks by reducing your position in a particular stock.

4.       Particular Stock in Consolidation Phase: If a stock is near its All-Time-Highs (given a very good up move recently) and now the stock is in a consolidation phase (that is not moving either way more than 2-3%) it’s better to either reduce the position or completely sell out if your conviction is low. If the conviction is high in the stock and you currently are in no need of cash, then you can continue holding the stock.

5.       Markets gave a Huge Correction (like in 2020 during Covid or in 2008 during US crisis): In such a scenario, prices correct very irrationally where in even technical/fundamental analysis won’t work. You can either hold the positions that you have (markets will definitely start being rational, but when will be the question so will need to keep the patience for holding) or if you have cash in hand with you, start adding stocks in which your confidence is high. If you are totally invested then what you can do is wait for the markets to rise and sell off stocks where in you feel that it is a wrong buy and switch to those stocks where your conviction is high.

6.       When the Stock seems Overpriced: This is a very subjective judgement that changes with every investor. Usually investors check valuations via different ratios. For example: A P/E of 50 would be very high for an investor but the same for the other investor would be okay and will not seem overpriced.

7.       New Opportunity Discovered: If you seem to find a stock in which you have more confidence, then it’s better to sell a stock which you feel will not perform as good.

Some the reasons to sell above are definitely difficult to time such as when a stock/overall market is expected to fall. But this would be a judgement call for a particular investor.

Hope this helps Fellow Investors in Making Better Sell Decisions!

Happy Investing!!!!!