There are right and wrong reasons to sell a stock. While it's generally a bad idea to sell a stock simply because its price has increased or decreased, there are situations that perfectly justify placing one or more sell orders.
Let's delve into several good reasons for selling a stock, when to sell stock for a profit or loss, and which circumstances do not justify selling a stock.
Reasons to sell a stock
Here's a rundown of five scenarios that can justify selling a stock.
1. Your investment thesis has changed
The reasons why you bought a stock may no longer apply. Examine why you bought the stock in the first place and ask yourself if those reasons are still valid. You should have an investment thesis for each of your stock investments, other than just wanting to make money.
If something fundamental about the company or its stock changes, that can be a good reason to sell. For example:
- The company's market share is falling, perhaps because a competitor is offering a superior product for a lower price.
- Sales growth has noticeably slowed.
- The company's management has changed.
- Managers are making reckless decisions, such as assuming too much debt.
Of course, this list isn't exhaustive. The point is that if something substantially changes that contradicts your investment thesis, that's one of the best reasons to sell.
When not to sell a stock
It's important to know when not to sell a stock. Here are some of the situations in which it's inadvisable to sell your shares:
- Don't sell a stock just because its price went up. Winning stocks often increase in price for a reason, and they also tend to keep winning.
- Don't sell a stock just because its price went down. Every investor wants to buy low and sell high. Selling a stock just because its price fell, if the reasons you bought it still apply, is literally doing the exact opposite.
- Don't sell stock just to save money on taxes. While the tax strategy discussed earlier, which is known as tax loss harvesting, can reduce your taxable capital gains by incurring losses on unprofitable stock positions, it's nonetheless a bad idea to sell stocks just to lower your taxes. Tax loss harvesting can be a smart tax-saving strategy, but only if you are choosing to sell a losing stock for other valid reasons.
The Motley Fool sells stock regularly, too
While The Motley Fool always approaches investing with a long-term perspective, that doesn't mean we only suggest stocks to buy.
We regularly give "sell" recommendations to our members, often for one of the reasons described above. There can be several valid reasons to sell a stock, and many long-term-focused investors frequently have reasons to offload parts of their holdings.
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When to sell stocks FAQ
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