You never want to sell a stock at a loss, if you can help it. However, you also don’t want to hold onto a stock too long and watch your losses get bigger. It can be difficult to decide when to cut your losses and sell. Especially during times of extreme volatility and market recession. The first important step is to try and take emotion out of the equation. Additionally, you should watch for some tell-tale signs that a stock is heading down in value. If possible, the smart move is to sell before things get really bad. Here are six signs that it’s time to sell a stock you’re holding.
The Price Drops 10% to 15% From a Recent High
Professional traders use all kinds of matrix and tools to evaluate when a stock has peaked. For individual traders who do not have access to such sophisticated tools, you can watch for one simple sign. When a stock’s price falls 10% to 15% from a recent high, take notice. It’s a clear indication that a stock’s price has peaked. It can also be a sign that it may have been overvalued to begin with.
The true value of the stock is likely somewhere below that peak. Keep an eye on a stock’s price. Be sure to set a stop loss order around 10% below a high. If a stock is trading at a peak of $300 per share, set a stop loss order at $270. That way if the share price falls 10% or more, you’ll liquidate your position. That gets your money out before it falls any further. Remember, it’s never a good sign if a stock price falls more than 10% to 15%. The red warning light should be flashing at that point.
The Sector is Experiencing Volatility
The shares of any company tend to belong to a particular sector of the economy. Apple, for example, is part of the technology sector. Starbucks belongs to the food and beverage sector. American Airlines is part of the airline sector, and the transportation industry, more broadly. Often, a particular sector can experience volatility all at once. That sends share prices down for all companies that are part of that sector.
Higher oil prices, for example, can negatively impact the airline sector because it consumes huge amounts of fuel. A trade war between the U.S. and China can negatively impact technology companies. Most of them manufacture their smart phones and computers at Chinese plants. When volatility comes to a sector, it typically hits shares of all the companies within.
If you see an across-the-board price drop in companies of a particular sector, take heed. It might be a sign that you should sell your position in a stock before it gets dragged down with the rest of the sector. Few stocks are immune to sector shocks and broad-based pull downs.
Executives Are Selling Their Stock
It may sound a little cynical, but another sign to watch for is whether executives are selling stock in a company they work for. When management starts selling their own holdings, it usually indicates that they anticipate the share price to drop in the near future. This can occur for any number of reasons. It might be a poor quarter, declining sales, increased competition, and so on.
What you can count on is that the top level leadership knows more about the status of their business than you do as an outside shareholder. The disclosure requirements for publicly traded companies are only semi-useful. The information is usually only revealed every quarter, concerning the buying and selling of stocks by company insiders. So, when those leaders are dumping stock, it might be a sign that you should too. At the very least, you should issue a stop loss order to protect yourself in the event of a serious drop.
The Company Cuts or Suspends Dividends
Companies that are profitable tend to pass along those profits to shareholders in the form of quarterly dividend payments. However, in tough times, companies will sometimes cut their dividend payments. Or suspend them altogether as they hoard cash and plow it into their struggling operations.
If you’re invested in a company that has paid regular and reliable dividends and they suddenly announce that those dividends are being reduced or stopped altogether, it’s definitely a bad sign. You can bet that the share price will fall soon. Cutting or suspending dividends is one of the most obvious signs that a company is in trouble. Negative changes to dividends almost always prompt a sell off and further decline in share price. Be wary of such a move.
Multiple Analysts Downgrade The Stock
Analysts aren’t always right. Individual experts often take contrarian points of view on a company and the direction they see its stock price heading. However, when multiple analysts downgrade a stock and recommend you sell, you may want to pay attention. Whenever you have many analysts singing from the same song sheet, it’s usually a sign that a stock is in choppy waters. The share price is likely to trend lower.
Several sell recommendations alone can be enough to depress a stock’s price. While you don’t have to pour over individual analyst reports, you should keep up on the news related to companies you own shares in. If you see that analyst downgrades are occurring with more frequency, you should heed it as a sign that it may be time to dump your holdings.
The Stock is Being Shorted
Shorting a stock is a trading strategy that speculates on the decline in a stock’s price. It’s an advanced strategy that is typically only used by experienced traders and investors. It basically means that investors are betting that the share price will fall.
A few months ago, Tesla stock shot up from $400 a share to over $900 a share. Fantastic, right? However, as Tesla’s share price peaked, it became the most “shorted” stock in the world. That meant that an overwhelming number of traders were anticipating that the share price would start to finally fall. The consensus was that Tesla’s stock was overvalued to the extreme. Some investors were trying to make money on the stock’s decline in value, rather than its appreciation.
Sure enough, Tesla’s share price recently traded back under $400. If you find out that a stock you own is being widely shorted by experienced traders and investors, watch out. It can be a sure sign that a depreciation in value is coming. You may want to get out while the gettin’ is good.
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