When to sell stock: How to decide when to sell a stock | Value Research When should I sell my stock? When to sell shares? When to sell a stock is an important decision. There are certain considerations that investors should keep in mind before taking this decision.

Six factors to consider when selling a stock

There are certain considerations that investors should take into account to decide when to sell a stock

When is the right time to sell a stock? This has always been a dilemma for investors. Most of the time investors either prematurely sell a good stock or continue to hold a bad stock. But the truth is that stock price and cost should not matter while selling a stock. What matters is how strong the company is and whether the valuations make sense. It is important for investors to control their emotions and be patient as only that will reward investors in the long run. While there are no hard and fast rules for this, there are some things to consider when you are thinking of selling a stock:

  • Fundamentals: When the company's earnings, return on equity or margins go down consistently even in normal times, then it may be a sign that the company is heading towards hard times.
  • Valuations: if a stock is trading at very high valuations compared to its historic valuations, it may be a concern. While stocks may not fall just because of high valuations, any decrease in earnings or momentum may result in a significant correction. This should be observed carefully in the case of growth stocks.
  • Out of favour product: If a company's product or service is going out of trend and its use case is continuously decreasing, and the company is not upgrading or pivoting, then maybe it is time to look elsewhere. This can occur due to changes in technology, the regulatory environment, or consumer preferences in general.
  • High debt: Having debt on the balance sheet is not bad. But if debt exceeds what the company can handle, then it is a potential threat. To know how financial leverage can both be a boon and bane for a business.
  • Management: Quality of the management is of utmost importance as they get to decide where the company is headed and how will it achieve that. If there is a small doubt about the integrity of the management or if there is a significant level of pledging without any solid reason, then these are strong reasons to exit the company.
  • Auditor's report: If an auditor reports that the disclosures are not satisfactory or informs that the information presented is incomplete, investors can take it as a sign of caution.

The factors mentioned above can also be considered in combination as most of the time one may affect the other. For example, a consistent decrease in profitability can be a result of a company's out-of-trend products or the auditor reporting lack of disclosure may be due to bad management quality. The source for all of these factors is the annual report as it consists of everything, from the chairman's message to the management discussion and auditor's report, and more.

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