While acquiring stocks is relatively easy, understanding when best to hold or sell them can prove more challenging.
Prior to purchasing or selling an investment, investors should outline a personal investment plan detailing their short and long-term investment objectives.
Because there is not a single universal method for selling stocks, investors may have to do extensive research or get in touch with a financial advisor for assistance to develop a plan fitting their financial objectives.
When drafting an investment plan, investors must take into consideration their personal tolerance towards potential losses and a time horizon in which they expect a return.
Developing a personal plan
With regards to tolerance, some investors will forgo the chance for larger returns in order to keep the risk as low as possible.
Some may prefer an opposite approach and are prepared to take risks.
A high risk, high return strategy is best suited for investors with active participation in the stock market and those with high expectations of gains within a short period.
By understanding their personal tolerance, investors can plan for when to buy, sell and hold their assets, as well as for what kinds of equity to purchase and to know the required capital to allocate for their investments.
It is also important for investors to determine when they can expect a return on their investment.
If an investor has a long-term time horizon, they can likely ride out short-term price fluctuations.
However, if the investor requires a return or withdrawal within a shorter term, meaning one or two years, investors will likely have to think of a different strategy for holding or selling their investment.
Additionally, each investor can have different objectives towards their investment.
Outside of factors such as age, financial situation and social context, other developments can vastly influence an investor’s view and financial choices.
For instance, a young adult is more likely to hold their investments or zigzag between different stocks for years before withdrawing their capital for other uses.
Conversely, an investor approaching retirement will likely have a shorter time horizon.
There exists a popular long-term passive strategy is called a “buy-and-hold strategy”, in which an investor buys and holds stocks over a long period of time.
Buy-and-hold investors typically invest in stocks based on a company’s long-term financial fundamentals, such as revenue, potential profit, strength of management team and consistent track record, while putting little emphasis on short-term price fluctuations.
Reasoning for selling stocks
When setting their personal goalposts, investors will come to consider when to sell their stocks.
The rationale may include adjustments to the investor’s portfolio, the freeing up of capital, when a price target is reached, opportunity costs, technical signals, selloffs and changes to fundamentals.
Portfolio adjustments
Due to price changes, life events or even the accidental concentration of capital into one sector, investor portfolios can become unbalanced and deviate from investment goals.
The most common reason for selling stocks is to make such adjustments.
There are many reasons why a portfolio might become unbalanced or inappropriate for investment goals.
Experts strongly recommend investors to diversify their portfolio to reduce risks and losses and balance income – as such, adjustments are unavoidable nevertheless.
Freeing up capital
There comes a time when investors need the money they have invested for personal uses – ranging from starting a business to perhaps just everyday living. In such situations, investments may be sold to free up money or capital.
Price target reached
Selling at a target price is a common strategy among investors.
Some prefer to steadily sell their position as the price reaches their target, while others prefer to sell all-out at one price point.
Opportunity cost
Opportunity cost is the potential benefits lost when choosing one alternative over another.
In the case of stock investment, if it is judged that alternative options might generate a larger return, investors may decide to sell their stock and bail out.
Technical signals and selloffs
Skilled investors familiar with technical analysis and charting analyse stocks price patterns and movements through various indicators and establish a predetermined sell signal.
Should they believe that a pattern will lead to a prolonged downtrend, they might unwind the position.
Sometimes, stocks may keep on declining indefinitely with no signs of returning, with investors having to get rid of that portion of their investment to prevent further losses.
Change in fundamentals
Changes in a company’s fundamentals can include a change in leadership or staff, or a decline in quarterly/annual income.
Investors holding a stock for many years often monitor the company’s financial statements, revenues and overall performance.
If the company’s performance is not turning out as good as the investor had expected, they may consider selling before the financial situation gets worse.
Understanding and monitoring the fundamentals of invested stock is crucial to making an earning.
Buying and selling stocks is similar in that investors must make sure their current investments align with their financial objectives.
Investors must understand their risk tolerance, time horizons and reasons to sell stocks. Investors are encouraged to carry out research or contact a professional to help them stick to their objectives and make informed investment decisions.
Prepared by: Cambodia Securities Exchange (CSX), Market Operations Department.
Email: [email protected].
Tel: 023 95 88 88 / 023 95 88 85.
