When to Sell Stocks
A useful guide for when to sell stocks is to look at the flip side of when to buy stocks. In establishing the concept of value investing Graham Green taught that the investor should analyze a company and come to an opinion as to its real value. This was the beginning of fundamental analysis instead of pure speculation for many stock market investors. The opposite side of buying stocks, because their real value is far above their stock price, is selling stock when its real value has dropped. In this case there is no longer a margin of safety between the real value or intrinsic value of the stock and the stock price. There are several ways to look at a stock to see if its intrinsic value warrants holding it or selling. The ideal situation for many is that stock investment is always a matter of long term investing. Thus fundamental analysis outweighs technical analysis, the investor only pays a commission when buying, and the company prospers forever. Because this is mostly not the case we are taking a look at when to sell stocks.
There are stocks that you want to own and stocks that you do not want in your stock portfolio. If you are looking for stocks with high real value or intrinsic value you can start by looking for securities whose shares appear underpriced by analysis of company fundamentals. Stocks that are trading at a discount to book value, have a high dividend yield, have a low price to earnings ratio or a low price to book ratio. The concept of intrinsic value looks at the discounted value of all future distributions. Because there is investment risk in all decisions many successful value investors look for very good companies that are underpriced and not penny stocks with promise. The idea is to adhere to a margin of safety. The basis of knowing when to buy and when to sell is that the investor needs clear and accurate information. Lack of clear information is, for many, when to sell stocks.