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Ask a Fool: I Invested in a Stock That Quickly Doubled. Should I Sell It?

By Matthew Frankel, CFP® - Oct 18, 2019 at 12:00PM

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The short answer: It depends.

Q: I bought a stock in January, and it has since gained more than 120%. Should I sell it to lock in my gains?

It's generally a bad idea to sell any stock just to "lock in your gains." For example, if I had sold my Square stock after it doubled from my purchase price, I would have missed out on an additional 180% of gains.

However, there are some good reasons to sell a stock for a profit. If you think the stock is unjustifiably expensive, for example, or if the company's growth has started to noticeably slow down, it could be a smart idea to sell. It can also be wise to sell if you need the money. But don't sell the stock of a great business simply because it's worth more than what you paid for it.

Taxes are another important consideration. If you sell before you've owned the stock for at least a year, your profit will be considered a short-term capital gain, which will be taxed at your ordinary income tax rate. If you hang on until more than a year has passed, it will qualify for the significantly lower long-term capital gains tax rates.

Since you're up 120% on your investment, the tax difference between selling and waiting should be substantial.

Now, I'm not telling you not to sell. I'm just saying that you shouldn't sell if you can't think of a good reason other than the rise in price.

Matthew Frankel, CFP owns shares of Square. The Motley Fool owns shares of and recommends Square. The Motley Fool has the following options: short January 2020 $70 puts on Square. The Motley Fool has a disclosure policy.

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