Many investors are frustrated with the stock market at this point. Stocks have been down since the start of the year, and a lot of people are seeing on-screen losses in their portfolios.
If you're sitting on stocks that have lost their share of value, then you may be tempted to sell them now to minimize the financial hit. But if you're going to sell a stock, it's important to do so for the right reasons.
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When it pays to sell a stock at a loss
Selling a stock at a loss can make sense when that specific company is underperforming. Say you're invested in a pharmaceutical company that had several drugs in its pipeline that have failed to move forward or gain FDA approval. It's easy to see how a situation like that could lead to a negative outlook for that company -- and a lower share price to go along with it.
Similarly, let's say you own a tech stock that's consistently missed earnings expectations over the past few quarters, and that's been hemorrhaging cash. That's a stock you may want to unload.
When it doesn't pay to sell a stock at a loss
It's one thing to unload a stock you no longer have faith in. But now's not the time to sell a stock simply because its share price is down as part of a broad market trend.
These days, a number of solid companies are trading at a lower price than they were at the start of the year due to a general market downturn. But that doesn't mean those stocks won't regain their value once the broad market recovers. And rushing to sell a stock like that could mean locking in losses needlessly.
How to benefit from losses in your portfolio
Nobody likes to lose money on a stock. But if that's a scenario you land in, the upside is getting to take advantage of a strategy known as tax-loss harvesting.
Any time you sell a stock at a loss, you can use that loss to offset capital gains in your portfolio. And if you're not sitting on any gains this year, you can use up to $3,000 of your loss to offset ordinary income.
Furthermore, losses can be carried forward from one year to the next. So, let's say you sell off an underperforming stock and take a $5,000 loss in the process. If you don't have gains to offset, you can apply $3,000 of that loss to your ordinary income and then carry the $2,000 remainder into 2023.
Don't make rash decisions
At a time when so many portfolios are down, it's easy to see why investors may be eager to sell off stocks. But remember, you don't actually lose money until you officially sell stocks at a lower price than what you paid for them. If you own shares of a company with clear struggles, that's a good reason to sell. Otherwise, your best bet is generally to sit tight and wait things out.
