When should you sell a stock you own? For starters, think about selling when a company's business changes in a way that doesn't fit with your reasons for owning the stock. For example, imagine that you bought shares of Microsoft (NYSE:MSFT) partly because of its great success running a software business with high profit margins.
If it announced it was going to build and sell computer hardware, you would have to reevaluate it. Computer hardware is a lower-margin business and would likely reduce Microsoft's overall profitability. Selling might be in order. (Of course, selling computer hardware is hardly a death knell for a company. It's possible for a company to make a lot of money doing it well -- consider Dell (NASDAQ:DELL), for example.)
Another reason for selling is if your stock becomes significantly overvalued relative to your target price. If you bought shares of Wal-Mart (NYSE:WMT) at $40 per share, for example, and it's now trading around $55, up 38% and well above your target price of $50, you might sell. However, don't forget to consider the tax consequences -- you don't want to pay much of your gain to Uncle Sam. This is why Fools often like to buy and hold for the long term, through periods when a stock is significantly overvalued as well as undervalued.
You could also give serious thought to selling if you find a much more compelling investment. If your Foolish calculations suggest that a stock you own is now fairly valued and another stock appears to be undervalued by 50%, transferring your dollars might make sense. Again, though, consider tax consequences.
Here are some more reasons you might think about selling:
- If you think you'll need the money within three to five years. No one knows what the market will do in the short term.
- If too much of your net worth is tied up in one stock. Portfolios should be diversified. Our general rule of thumb is to aim to hold eight to 15 stocks, with no more than 33% in any one stock.
- If you can't remember why you bought the shares in the first place.
- If you're only hanging on for sentimental or emotional reasons.
You can learn a lot more about when to sell (and buy) in this How-To Guide. And if you're interested in some companies that our analysts believe are very promising investments, check out our newsletters and research products.
