Episode 7: When to Sell a Stock pt. 1

Season 2
Season 2
Episode 7: When to Sell a Stock pt. 1

Today we’re going to talk about how and when to sell a stock. A lot of new investors ask me how to know when they should sell their stock. This seems to be an issue that troubles a lot of people because they don’t want to sell their stock, regardless of if they have a loss or gain. Personally, selling the stock has always been harder than buying a stock.

I’m a lot looser with my stock purchases than I am with my stock sales, so this question has come up several times. The first time I addressed it in writing, I printed out the transcript and I decided to use that as my template. I’m not a stock expert, I’m not a guru, or a thought leader but I’ve been trading since around 2012 and I’m very comfortable with what I do. I have no problem explaining how I do it, so when it comes to the issue of stock sales, I came up with five tips that I look for.

Before I sell a stock, I ask myself five questions:

  1. Do you need to sell, or do you just want to sell?
  2. Did you make money?
  3. Did you lose money?
  4. Do you think you will make money?
  5. What would you do with the money after you sell?

The reason that I think these are important questions to ask yourself is because I am not a licensed trader, I cannot give you advice and when people ask me about selling stock, I’m always in a conundrum because the people who asked me this stuff, some of them may be my family and friends, but some of these are complete strangers, and I don’t really feel comfortable giving complete strangers advice. It’d be weird for me to start asking complete strangers questions like how much money do you make? That sounds really suspect and scammy. So, I try to avoid asking personal questions and try to avoid giving advice when people ask me if they should sell their stock. With these set of questions, I can kind of force the person who asking the question to really think about their situation and consider their needs. 

This situation came about from a gentleman, Mr. Payne, who was investing in Nike, and he basically said, “Hey, I just bought Nike and it was an impulsive buy, I don’t even like Nike, I’d rather shop at Walmart. I don’t care for name brands; I can get by with the shoes and the clothes at Walmart.”  Personally, I hold some of the stock because I spend a lot of money on Nike. So, he asked me this question and the first thing that caught my attention was the fact that he said that it was an impulse buy and then the second thing was that he does not like Nike.

So, without asking him how many shares he purchased, did he make money, or did he lose money, I decided to ask him if he needed to sell the stock (these are rhetorical questions). Do you need to sell the stock? If you need to sell the stock, I will always suggest that you dump the stock, you sell it fast, drop it like it’s hot. You shouldn’t be investing money that you need. Stock is a very liquid asset so, I would always suggest getting rid of any stock that you have if you’re in a situation where you need money, that’s what stock is for. 

I wouldn’t suggest investing money that you don’t need in the next pay period. I used to live paycheck to paycheck and now I don’t. I only invest money from my last paycheck so when I get my second paycheck of the month, I always make sure that I take whatever is left over from my old paycheck and save some of it and invest some of it. I wasn’t always able to do that, but now that I budget, and I’m a little more careful with my finances, I generally always have a couple of dollars left over. My new money that goes to the bills and my old money that goes to my savings and investing account. 

My second question is always, did you make money? If you made money, it’s always a great to take time to sell some stock. I don’t suggest you sell it, but if you made money, you must realize that gain eventually, if you don’t, it may turn into a loss. The stock market is very funny, it’ll be up one day and down the next. I always suggest that you take some of your profits off the table, or at least consider it. 

If you have 10 shares of a stock, and you made a profit, you don’t have to sell all 10 because the stock might keep going up, you can sell five shares and keep the rest just in case the stock keeps going up. I think you should always consider taking some of that money off the table because if you don’t, the stock market generally will find a way to take that money from you. 

Realize your gains, you don’t want to be sitting on too many unrealized gains. Even if you’re holding that stock long term, it’s always good to take some of your profits off the table and not even worry about the taxes. Every time you sell stock, it’s a taxable event so you don’t want to make those sell decisions based off the taxes you want to pay. 

Recap: If you need the money, sell it. If you didn’t make money, or if you did make money, consider taking some profits or consider cutting the losses early. If you took a loss, then you want to lower your losses by making sure that you don’t stay in a stock any longer than possible. A lot of people hold on to a stock hoping that it comes back. Some people like to average down. When you’re averaging down, you’re constantly buying a stock and when you catch a falling knife, you’re just buying the stock because it’s low. Even the best experts have trouble telling which is which. 

My solution, especially if you’re a new investor, is to limit your losses and go in with a goal. My goal for a lot of my stocks that I invest in is that once the stock is up 10%, I want to take some profits, or I want to sell the whole thing. Once the stock is down 10%, I’m going to get rid of it because I don’t want to be sitting on a 15% or 20% loss. So that’s my number two – did you make money?

Follow Basheer and Pocket Change Investments at his website, www.pocketchange.investments and on Facebook and Twitter. Subscribe to the Pocket Change Investment podcast on Apple, Spotify, or other podcasting platforms.