It’s a bit like selling a home
Just like in real estate, the value of stocks vary and one can only hope that one is selling at the best price. There’s never a guarantee (and that’s also kind of fun), but by tracking the ups and downs of a market, one can make an educated guess on when it is best to sell. Knowledge is the best asset when making the decision, since stock prices are just trends caused by various external factors - like political turmoil, natural catastrophes, or a sudden interest in alternative currencies. That being said, it’s always good to have some luck on your side.
How are stocks sold?
Today there's multiple ways to sell stocks. Sell order is the most common, which is when one orders for a stock to be sold. There are three main ways to do a sale order: stop orders, limit orders, and market orders. The simplest is the market order which is executed immediately at the current market price. Limit orders are only executed if the buy price is below or the sell price is above a certain threshold. Stop orders on the other hand can be referred to as stop-loss orders. They are executed when the price of a stock dips under a certain price to insure you don’t lose even more value. Apps have also made their way into the stock market, and many investors - especially first timers - choose this method. We are big proponents of apps as they are a barrier-free way for people to join the stock market game. These apps do not charge commissions on sales, which is a huge plus. A financial advisor, on the other hand, does receive a commission for executing your order within 24 hours. This deadline is not just to add pressure to their lives. It is important so that the stock prices don’t change too much from the sales order to the actual sale.
The enter-exit game (or the stocks fortune-seller)
How can one be sure that it's a good time to sell? Surely there are resources, advisors, and signs which help investors make THE right decision on when to sell. This process has a name: market timing, or as we like to call it, the stocks fortune-teller (or should we say seller...). In a surprisingly similar fashion, market timing is just as much guess work. It is a trend forecasting method where one looks at past actions within the market and makes an educated guess on its future development. Sometimes it works, sometimes it doesn’t (but you surely hear more about the times it doesn’t). No one has found the secret formula for predicting stocks yet, and they are trying very very hard. Nevertheless, you’ll never really know when is the best time to enter (buy a holding) or exit (sell a holding).
Instead of performing guesswork, it's better to set a financial target that will determine when to sell the stock. It might not always work, as you never REALLY know how much higher a stock can go, but it will help your nerves as it's a little bit more of a rational process. To guess the best price a stock can sell for, the closest thing to a secret formula companies use is a price earnings ratio (P-E ratio) set by GAAP (generally accepted accounting principles). It is an equation that multiplies the earnings per share by 16.5, and gives it a price accordingly. For example, a company with earnings of earning $1 per share will be valued at $16.5 per share.
Why will your future self thank you?
Most investment gurus say that it’s better to hold onto your stocks, but there are always reasons one should sell a stock. For example, one might need the money, or the stock has been performing really badly (and maybe it wasn’t the best idea to buy it in the first place). The profits one gains from a stock will be determined by its sale, so it’s important to pay close attention to the market before making this decision.
- In 1976, one of Apple's cofounders sold his stocks for $800. Todays those stocks are worth $35 billion. Oops.
- How random is 16.5?! Apparently it has been the average of earnings since the 1800s.
- Buy-and-hold investing is when one holds a stock passively for a long period of time (and the reason why it’s a good idea to start investing young!).