How can you tell when to sell a stock? Here are 5 ways to tell

Nick Sundich Nick Sundich, June 6, 2024

How can you tell when to sell a stock?

If you don’t sell a stock, you can make significant losses, but if you sell a stock too early you run the risk of missing out on gains if and when a company rebounds.


5 ways to determine when to sell a stock


1. Poor financial results

This can be the best indication of when it’s time to sell a stock – and many investors understand this, hence why a company’s share price often falls after poor financial results. But it may not always be prudent to follow them. It’s important to understand why the company is experiencing poor financial results. If the company has recently implemented changes that have not yet had time to bear fruit, selling may be premature.

Alternatively, if the company has failed to adapt in light of changing market conditions, or if its management team is behind on meeting certain milestones and targets, then selling may be more justifiable. It can also help to understand how pervasive the poor performance is across specific sectors or industries.

If competitors are also struggling due to external market forces such as recessionary pressures or shifts in consumer behaviour, then holding onto a stock with poor performance may not be as risky as it appears at first glance.

Conversely, if other companies in the sector appear resilient and their stocks are continuing to gain value despite sluggish economic conditions, then selling might be an appropriate strategy for investors with an underperforming asset.


2. Poor consensus estimates

When pondering if its time to sell a stock, many investors rely on consensus estimates from analysts as an indicator of whether or not the stock is a good investment. These estimates are based on past performance and industry trends, and often include price targets for the stock.

However, if consensus estimates are poor, it does not necessarily mean that it is time to sell the stock. This is particularly true if there aren’t many analysts covering the stock. As a general rule, if there are less than four analysts covering a stock, estimates should be taken with a grain of salt (in other words, taken with mild scepticism).

Also keep in mind that poor consensus estimates can be caused by a variety of factors such as recent news affecting the company’s performance, an unexpected drop in earnings, or changes in market conditions.

Ultimately, when deciding whether or not to sell a stock, investors should weigh all available information to make an informed decision that is best suited to their financial goals.


3. Poor market conditions

One way to tell when it is time to sell a stock is by assessing the current market conditions. If the stock is being affected by an economic slowdown, or geopolitical tensions, then it may be wise to consider selling. This is particularly if these issues are likely to persist in the medium to longer-term and thereby inhibit the company. 

However, of all our 5 indications as to when it’s time to sell a stock this is arguably the least useful because you may be able to pick up a good company at a good price.

An investor should also track the stock’s performance relative to its industry peers. It could well be time to sell the stock if the company is handling the economic slowdown worse than its peers.


4. Technical indications

It is also important to look at technical indicators of the stock such as its price movements over time, trend lines, and support and resistance levels. These can help identify when a stock has reached its peak value or if it’s time to exit in order to maximize profits. Although technical indications can be difficult for average investors, one simple metric is the RSI (Relative Strength Index).

In essence, if a stock’s RSI is over 70 it might be overbought and consequently, it may be time to sell a stock. But if it is below 30, it is oversold and it may be time to buy (in theory).


5. Insider selling activity

Lastly, monitoring insider selling activity can provide insight into whether company insiders believe that the current price of a stock is undervalued or overvalued relative to its intrinsic value. If there is an increase in insider selling within a particular company, this could be an indication that the company’s outlook is bearish and that now may be a good time to sell the stock for profit. By insiders, we mean directors, other staff and perhaps institutional investors.

Investors should be particularly fearful if any of them selling. They can find this out through ASX announcements, although there are a few databases that track director trades too. Granted, directors may sometimes have a legitimate excuse such as meeting a divorce settlement.

But if the company justifies the move by saying it was ‘to diversify’ his or her portfolio, investors should be fearful. Why would they be selling if they thought the stock could go up more.


When asking if it is time to sell a stock, don’t forget your own objectives

When making the decision about when it’s time to sell a stock, investors should consider their personal goals, investment horizon and risk tolerance. Depending on what they are hoping to achieve – whether it’s capital appreciation over time or short-term gains – they may have different opinions about when it makes sense to sell a stock with poor financial performance.

Ultimately though, careful analysis and consideration of various factors will go a long way towards helping investors make informed decisions about when and how they should exit a position in order to maximize returns while mitigating risks associated with investing in the stock market.


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