When Should You Sell a Stock?

If you know anything about stock investing and the stock market, you've probably heard the phrase, 'buy low and sell high'. This basically means if you want to make money in the stock market, you have to buy a stock at a low price and then sell it for a higher price. This is a basic principle that only makes sense. Unless you are short-selling, you have to buy a stock for a higher price than you bought it in order to make a capital gain.

It sounds easy enough, right? Well, once you try to put it into action, you fall into some road blocks. How do you know when a stock is low enough to buy or high enough to sell? Investment professionals always tell you that you can't predict the stock market, so how can I know I'm selling at the right price?

The truth is you will never know for sure. From time to time you will sell a stock because you feel it is at its peak only to watch it skyrocket once you've sold it. This is just how it is, and if you are able to avoid this, you are one lucky investor.

While you can't predict what a stock will do 100%, you can make a good educated guess. This is where analysis comes in. This is why you must research your stocks and pay attention to what the company is doing. First let's look at fundamental analysis. Fundamental analysis is when you base your stock purchases and sales on the company itself. You look at the financial statements, read about what the managers are doing, and look at the financial ratios.

If you see in the news that your company is probably going to acquire another company, chances are that stock will go up until it is acquired, or it will drop if they decide against it as in the case with Microsoft and Yahoo. Your job is to look at the facts and decide if you really think that company will acquire the other and if it will go up. Also, you need to make sure you get in as soon as possible when it's low. If it's already jumped a lot, it may not go much higher. It could, but this is where you need to make your decisions.

Or maybe you look at the financial statements of one of your stocks for the year and you notice that they have invested a lot in a new line. Maybe this new product will do amazing? So you keep the stock a little longer. Or maybe, you notice the company hasn't made much of a profit and you also notice their products aren't flying off the shelves as they used to. If you are at a high price, sell if you feel it will drop.

This is all about what you feel the stock will do based on what you know about the company. I can't tell you the perfect time to buy or sell; you have to figure it out for yourself. The other type of analysis is technical analysis. But we will leave this for another article.

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