When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
When should you sell a stock?
When to sell a stock can be as important as when to buy it. The specific timing will vary according to the specific situation, but the best method tends to be one of the four listed in this article.
Big ideas
- Investors should spend as much time thinking about when to sell a stock as they did when deciding whether to buy.
- Knowing when is the best time to sell stocks requires actively following the share price and news about the underlying business.
- Selling a stock at the right time requires understanding the business and what it is worth and contrasting that with its market value.
Buffett’s best time to buy a stock
“Our favourite holding period is forever.”
- Warren Buffett
- Warren Buffett
Buffett's strategy of holding on for the long term seems to go beyond the stock market. He still lives in the same house he bought for $32,000 dollars in 1958. His friend Bill Gates once joked that Buffett had decided what food he liked at 6 years old and had eaten nothing but hamburgers and Coca-Cola ever since!
Buffett would like to hold every stock forever. He has held onto his investment in Coca-Cola, which became a top position in 1988. In 2016, Buffett’s firm Berkshire Hathaway started to invest in Apple (AAPL), which as of May 2023 represented 45% of the firm’s invested assets. But he has had to cut ties with many investments because he decided it was the right decision.
Thankfully, UK investors can access commission-free trading with Trading 212, so when the time comes to sell a stock, you can do so without fees being a major concern.
Buffett would like to hold every stock forever. He has held onto his investment in Coca-Cola, which became a top position in 1988. In 2016, Buffett’s firm Berkshire Hathaway started to invest in Apple (AAPL), which as of May 2023 represented 45% of the firm’s invested assets. But he has had to cut ties with many investments because he decided it was the right decision.
Thankfully, UK investors can access commission-free trading with Trading 212, so when the time comes to sell a stock, you can do so without fees being a major concern.
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When should you sell a stock?
The best time to sell stocks is when one of these four conditions is met.
1. Sell when a better opportunity arises
“I might mention that the buyer of the stock at $80 can expect to do quite well over the years. However, the relative undervaluation at $80 with an intrinsic value of $135 is quite different from a price of $50 with an intrinsic value of $125.”
That is Buffett saying he decided it was time to sell shares in a business trading at a discount so he could buy shares in other businesses at a bigger discount. To Buffett, the bigger discount represented a better option.
As an investor, you only have limited capital and it is your job to do the best you possibly can with that capital to earn the highest possible risk-adjusted return. Buffett reminds us that there are almost unlimited new opportunities coming along, and with only limited resources, quite often an investor has to sell one stock in order to buy another.
In this example, Buffett has two stocks. He knows the share price for both and he knows what he thinks both of the underlying businesses are worth. Although he likes both investing opportunities, he has a favourite. As a good investor, he makes the decision to own the stock that is most undervalued and sell the stock that is less undervalued.
As an investor, you only have limited capital and it is your job to do the best you possibly can with that capital to earn the highest possible risk-adjusted return. Buffett reminds us that there are almost unlimited new opportunities coming along, and with only limited resources, quite often an investor has to sell one stock in order to buy another.
In this example, Buffett has two stocks. He knows the share price for both and he knows what he thinks both of the underlying businesses are worth. Although he likes both investing opportunities, he has a favourite. As a good investor, he makes the decision to own the stock that is most undervalued and sell the stock that is less undervalued.
Key takeaway
Make sure you know the intrinsic value of the businesses that you own. When trading stocks from the UK or internationally, make sure you understand the story behind the company and follow the fundamental data available in the Trading 212 app. Sell if you think the capital invested is better used investing in another business.
2. Sell if the initial purchase was a mistake
Just like it is possible to rush into a relationship and realise it was a mistake, the same thing can happen with investments. Everyone makes mistakes and the only way to recover from them is to own up to them and move on.
Let’s use an investment in Zoom stock as an example.
When covid-19 lockdowns were implemented in 2020, investors quickly realised that video meetings were about to become the norm and they rushed to buy businesses in the space.
Let’s use an investment in Zoom stock as an example.
When covid-19 lockdowns were implemented in 2020, investors quickly realised that video meetings were about to become the norm and they rushed to buy businesses in the space.
Source: Google FinanceEXAMPLE
Zoom (ZM) a company offering video-conferencing software saw its share price jump 132% in 4 months.
Zoom Technologies (ZTNO) rocketed to an 1800% gain.
Zoom Technologies (ZTNO) rocketed to an 1800% gain.
Unfortunately, the gains for ZTNO were because of investors who thought they were buying ZM. They bought the wrong zoom! Zoom technologies is a completely different business from Zoom and has nothing to do with video conferencing. Once the mistaken buyers realised this, the ZTNO share price tanked.
3. Sell when the price goes up a lot
Imagine you wake up one day and your position in a business is worth 18 times what it was a few days ago. This is probably one of the best opportunities you will have to sell at a high price.
As a reminder, what a company is priced at and what it is worth are two very different things. Rapid rises in a share price in the short term can often be caused by irrational exuberance rather than the underlying fundamentals. Savvy investors can use this as an opportunity to sell out and buy into a new position.
For example, take those UK investors who decided to buy Apple stocks in 2018: the 5-year total return for Apple investing is 300% (as of May 2023). That means £100 invested in AAPL stock 5 years ago (May 2018) would be worth £400, including price appreciation plus reinvested dividends. To invest in Apple shares after a huge price gain can be risky, and there may be opportunities to invest in other great companies at a lower valuation.
Similar reports, such as historical value and performance, are available for each trading instrument on Trading 212. You can explore UK, US and European stocks, ETFs and more and deep dive into the key rations such as earning per share, revenue, ROA, and free cash flow, to name a few. To sort things out, we’ve also prepared an article on How to read financial statements, which may come in handy.
If you are fortunate enough to buy a stock that suddenly rockets in value, the first thing to ask yourself is: Has anything changed with the businesses or is this rise being caused by something unsustainable?
This third strategy often fits neatly alongside the first strategy. You have a stock to sell that has become overvalued (or a lot less undervalued). This likely leaves lots of other stocks that could be bought at relatively better valuations.
As a reminder, what a company is priced at and what it is worth are two very different things. Rapid rises in a share price in the short term can often be caused by irrational exuberance rather than the underlying fundamentals. Savvy investors can use this as an opportunity to sell out and buy into a new position.
For example, take those UK investors who decided to buy Apple stocks in 2018: the 5-year total return for Apple investing is 300% (as of May 2023). That means £100 invested in AAPL stock 5 years ago (May 2018) would be worth £400, including price appreciation plus reinvested dividends. To invest in Apple shares after a huge price gain can be risky, and there may be opportunities to invest in other great companies at a lower valuation.
Similar reports, such as historical value and performance, are available for each trading instrument on Trading 212. You can explore UK, US and European stocks, ETFs and more and deep dive into the key rations such as earning per share, revenue, ROA, and free cash flow, to name a few. To sort things out, we’ve also prepared an article on How to read financial statements, which may come in handy.
If you are fortunate enough to buy a stock that suddenly rockets in value, the first thing to ask yourself is: Has anything changed with the businesses or is this rise being caused by something unsustainable?
This third strategy often fits neatly alongside the first strategy. You have a stock to sell that has become overvalued (or a lot less undervalued). This likely leaves lots of other stocks that could be bought at relatively better valuations.
4. Sell when the fundamentals change
Nothing lasts forever. The best investments last for a long time, but many good investments will eventually turn bad. Here are two examples showing that when to sell stocks is often not ‘forever’.
Buffett sold shares in UK supermarket chain Tesco when it became embroiled in a £250 million accounting scandal. He also sold out of positions in airline shares when it looked likely that the Covid-19 pandemic would impair air travel
Companies can change and so can the business landscape in which they compete. As an investor in a business, we need to be able to recognise when this is happening and be level-headed enough to act on that knowledge.
Buffett sold shares in UK supermarket chain Tesco when it became embroiled in a £250 million accounting scandal. He also sold out of positions in airline shares when it looked likely that the Covid-19 pandemic would impair air travel
Companies can change and so can the business landscape in which they compete. As an investor in a business, we need to be able to recognise when this is happening and be level-headed enough to act on that knowledge.
How to know when to sell a stock
Investing in individual companies requires research to understand the value of the businesses and how that compares with the value implied by share prices.
Your understanding of the value of a business and keeping up to date with movements in the share price provide all the data you need to know exactly when the sale of stock is appropriate.
As a reminder, sell a stock:
Your understanding of the value of a business and keeping up to date with movements in the share price provide all the data you need to know exactly when the sale of stock is appropriate.
As a reminder, sell a stock:
- When there is a better opportunity
- If the purchase was a mistake
- When the price rises a lot unjustifiably
- When the fundamentals change
Recap
All of these reasons for selling a stock share a common theme. They centre around a good understanding of the business you are invested in and rely on your clear justification for why you bought at a certain price.
Investing in index funds is passive investing, while the act of buying individual stocks is active investing. The clue is in the name. Investing in Apple or other individual companies requires an investor to pay attention to them actively. Access to all the key financial statements, ratios and company reports for all trading instruments in the Trading 212 app can greatly assist in this process.
There is work and research that needs to be done at the start before a stock is purchased and ongoing work to decide the best time to sell the stock.
Investing in index funds is passive investing, while the act of buying individual stocks is active investing. The clue is in the name. Investing in Apple or other individual companies requires an investor to pay attention to them actively. Access to all the key financial statements, ratios and company reports for all trading instruments in the Trading 212 app can greatly assist in this process.
There is work and research that needs to be done at the start before a stock is purchased and ongoing work to decide the best time to sell the stock.
FAQ
Q: Can you sell stocks at any time?
If you own common stock, you will be able to sell your shares at any time during regular market hours. However, if you own restricted stock, you may be subject to certain restrictions, such as a holding period, that could prevent you from selling your shares immediately. Additionally, if the stock market is closed or trading is halted, you may not be able to sell your shares until the market reopens.
To support time-sensitive decisions about buying or selling, you should look for a brokerage that supports real-time charts. With Trading 212, you can invest commission-free from the UK, Europe and around the globe and buy and sell stocks instantly.
To support time-sensitive decisions about buying or selling, you should look for a brokerage that supports real-time charts. With Trading 212, you can invest commission-free from the UK, Europe and around the globe and buy and sell stocks instantly.
Q: When is the best time of day to buy stock?
Generally speaking, the most active time of the day for stock trading is the first and last hours of the trading session. In theory, buying and selling at these times offers the highest liquidity to execute trades. However, there may be times when certain stocks are more active, so it is important to do your research before making any decisions.
Q: Is now a good time to sell stocks?
The decision whether or not to sell your stocks should depend entirely on your own analysis and financial position. When the stock market is rising, selling risks missing out on potential profits, however, the higher it goes, the closer it will be to a top, which nobody can easily predict. When the stock market is falling, you will be selling at lower prices, but it is possible they can go even lower.
Financial ratios needed for your analysis are available in your Trading 212 account, along with advanced charts and tools. You can invest in Apple, Tesla and thousands more stocks from the UK and around the globe with just a few clicks. Of course, you should consider that your capital is at risk and investments may rise and fall.
Financial ratios needed for your analysis are available in your Trading 212 account, along with advanced charts and tools. You can invest in Apple, Tesla and thousands more stocks from the UK and around the globe with just a few clicks. Of course, you should consider that your capital is at risk and investments may rise and fall.
Q: When should you sell a stock?
The decision of when to sell should be based on a number of factors, including your investment goals, your personal financial situation, and the performance of the stock. If you're investing for the long term, you may not need to sell your stocks until you're ready to retire. On the other hand, if you're investing for a short-term goal, such as saving for a down payment on a house, you may need to sell your stocks as soon as they reach your target price.
- Intrinsic Value: The actual worth of an asset, such as a stock, based on fundamental analysis rather than its current market price. It considers factors like earnings, cash flow, and growth potential.
- Financial Statement: A formal record of a company's financial activities, including documents like the balance sheet, income statement, and cash flow statement. These reports help investors assess a company's financial health.
- Trading Instruments: Various financial assets that can be bought and sold in the market, including stocks, bonds, ETFs, commodities, and derivatives.
