Q: One of my stocks has dropped by 20% over the past few months. When should I cut my losses and sell?
There are certainly some good reasons to sell a stock, but there are also some bad ones. For example, selling a stock simply because its price dropped is a bad idea. The same can be said if a company merely missed earnings estimates. It's common knowledge that the goal of investing is to buy low and sell high, but if you unload a stock just because of a drop in price, you're doing the exact opposite. Having said that, the reason behind the price drop could potentially give you the justification to sell.
The most important question to ask yourself is whether your original reasons for buying the stock still apply. For example, if you bought a stock because you thought it had an untouchable share of the market, and this turns out not to be the case, it can be good cause to sell and move on. BlackBerry about a decade ago was a good example of this -- it looked bulletproof until competing products like the iPhone burst onto the scene.
Financial struggles within the company can be another good reason to sell. Are profits shrinking? Is growth slowing down? Is the company taking on a dangerous amount of debt? Did the dividend get cut? All of these could be signs of bigger problems.
However, if none of these good reasons to sell apply, and the price drop is due to something that doesn't change your investment thesis -- such as overall market weakness, worse-than-expected quarterly results, or a one-time issue like an asset sale -- it could still be a good idea to hold on despite a drop in the stock price, or even to take advantage of the newly discounted stock price and buy more shares.
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