At that place are correct and wrong reasons to sell a stock. While it's more often than not a bad idea to sell a stock simply because its price increased or decreased, other situations perfectly justify placing i or more than 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 non justify selling a stock.

Green button labeled Sell on a keyboard

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Reasons to sell a stock

Hither'due south a rundown of five scenarios that can justify selling a stock:

1. Your investment thesis has inverse.

The reasons why y'all bought a stock may no longer apply. Examine why y'all bought a stock in the first place and inquire yourself if those reasons are however valid. Yous should have a reason -- or an investment thesis -- for each of your stock investments other than just wanting to make money.

If something key about the company or its stock changes, that can be a good reason to sell. For example:

  • The company'southward market share is falling, possibly because a competitor is offering a superior product for a lower toll.
  • Sales growth has noticeably slowed.
  • The company's management has changed, and the new managers are making reckless decisions such as assuming as well much debt.

Of course, this list isn't exhaustive. If something substantially changes that contradicts your investment thesis, that'southward 1 of the best reasons to sell.

2. The company is being acquired.

Another potentially good reason to sell is if a company announces it has agreed to be acquired. Afterwards an acquisition is appear, the stock price of the visitor beingness acquired typically rises to a level shut to the agreed-upon purchase toll. Since further upside potential can be quite limited, information technology may be wise to lock in your gains shortly after the acquisition announcement.

Specifically, the style the company is beingness acquired affects whether selling your stock is the correct decision. A visitor can be acquired in greenbacks, stock, or a combination of the ii:

  • For all-cash acquisitions, the stock price typically rapidly gravitates toward the conquering price. But if the deal is non completed, then the company's share price could come crashing back downwards. It'due south rarely worth holding on to your shares long after the announcement of an all-cash acquisition.
  • For stock or cash-and-stock deals, your decision to concord or sell should be based on whether you lot accept whatever want to exist a shareholder in the acquiring company. For case, Slack Technologies (NYSE:WORK) recently agreed to be acquired by Salesforce (NYSE:CRM) in a cash-and-stock bargain. Slack shareholders who don't want to go Salesforce investors would be well advised to cash out.

three. You lot need the money or soon volition.

It's generally a all-time exercise not to invest in the stock market with any money you expect to demand within the next few years. Merely if you need the money, that's certainly a valid reason to sell.

Perhaps you desire to purchase a business firm and sell some stock to cover the downwards payment. Or you may accept children who programme to nourish college in a few years, and you want to convert your stock holdings into more secure investments such as certificates of deposit (CDs).

4. You demand to rebalance your portfolio.

Your investment portfolio tin become unbalanced in one or more means. That is why periodically rebalancing your portfolio -- which may involve selling some stock -- is necessary for most investors. These are two of the near common circumstances preceding a stock sale:

  • Owning a high-performing stock: If you own shares that take significantly increased in price, your position in the company may represent a large portion of the value of your portfolio. While this is a good problem to have, yous may not be comfortable with having then much of your coin invested in a unmarried visitor and choose to sell part of your stock.
  • Seeking to reduce your stock exposure: Every bit you become closer to retirement, it'south smart to gradually reduce your portfolio's stock holdings in favor of safer investments such every bit bonds. One popular rule of pollex is to subtract your age from 110 to determine the per centum of your portfolio that should be invested in stocks. If your portfolio seems too stock-heavy, and then selling some stock to reallocate your resource can be a good decision.

5. Yous identify opportunities to meliorate invest your money elsewhere.

In a perfect world, you'd always have spare cash to invest for every time y'all identify an attractive investment opportunity. Since that's probably not the case, you may decide to sell stock to invest the cash differently.

Let's say y'all find an incredible buying opportunity for one of your favorite stocks and decide you want 10% of your portfolio to be allocated to this investment. If yous don't happen to take 10% of your portfolio sitting in cash, you may decide to sell some shares of another stock or commutation-traded fund (ETF) yous own to gratis upwards some upper-case letter. In that location's probable nothing wrong with the other stock or ETF, but recognizing an excellent long-term opportunity elsewhere can exist a valid reason to sell.

When to sell stocks for turn a profit

Whatever of the above are good reasons to sell a stock for a profit. Having earned a profit from an investment can further justify selling the stock to pay for a major buy, your living expenses in retirement, or as part of your portfolio allotment strategy.

Just don't sell a stock for profit just considering the price increased. Doing that would be falling into the trap of assertive that it'southward a good idea to "take some money off the table" if a stock gains value.

When to sell stocks at a loss

Similarly, it's usually a bad idea to sell a stock only considering its price decreased. At the same fourth dimension, though, sometimes you but have to cutting your losses on a stock position. Information technology's important to not let a drop in a stock'southward price prevent you from selling.

As legendary investor Warren Buffett says, "The most important thing to do if you find yourself in a hole is to finish digging." If your original reason for ownership a stock no longer applies, or if y'all were just plain wrong about the company, and then selling at a loss rather than continuing to concord may exist your best option.

When non to sell a stock

Information technology'southward important to clearly know when not to sell a stock. Here's a list of some of the situations in which information technology's inadvisable to sell your shares:

1. Don't sell a stock just because its cost increased. Winning stocks increment in price for a reason, and they also tend to go along winning.

ii. Don't sell a stock just because its price decreased. Every investor wants to buy low and sell loftier. Selling a stock merely because its price fell is literally doing the exact opposite.

3. Don't sell stock just to save money on taxes. While a tax strategy known every bit revenue enhancement loss harvesting can reduce your taxable capital letter gains by incurring losses on unprofitable stock positions, information technology'southward notwithstanding a bad thought to sell stocks merely to lower your taxes. Tax loss harvesting can exist a smart tax-saving strategy, but only if you lot 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 simply propose stocks to buy. Nosotros regularly requite "sell" recommendations to our members and ofttimes for one of the reasons described to a higher place. There tin exist several valid reasons to sell a stock, and many long-term-focused investors oft accept reasons to offload parts of their holdings.