Ryan O’Leary is a writer and former financial services professional. He writes about personal finance for Wealthsimple and his work has been featured by the New York Stock Exchange. Ryan holds a Bachelor's degree in International Business from University College Cork in Ireland.
Selling stock can seem a little intimidating and comes with its fair share of risk. Here’s what you need to know about selling stock, and when you should do it.
You can sell stock right now. You may be surprised by this. You might even be a little intimidated. However, the barriers to entry are minimal.
How to sell stock
First thing’s first. In order to sell stock, you need to buy stock. After all, you can’t sell them if you don’t have them to begin with. Once you have stocks, you can sell them on the stock market. There are physical markets, like the New York Stock Exchange on Wall Street, where traders sit and make trades, but more and more stock trades take place online.
When you buy a stock of a certain company like, say, General Motors, you’re not actually buying stock from GM proper. Instead, you’re buying stock from another investor currently in possession of that stock. It’s the same when you sell; you’re not selling your stock back to the company. You're selling it to someone else. If you want to buy a stock at its current price, you place a market order, which is basically a bid. Then that order is matched up with a seller who’s listed their stock at your desired price, and, boom, a trade is made.
You’ll need a broker who will do the trade for you, or an investment platform where you can trade yourself. Online brokerages and trading platforms offer a variety of services. You just need to decide how much you’re willing to spend, what kind of trading experience you’re looking for, and what kind of investing you want to do.
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Before you’re ready to hit the market, you need to evaluate a couple of things to make sure you’re ready.
Decide if it's right for you
Buying and selling stock is not for everyone, and that’s okay. After all, it can be time- and effort-intensive and it comes with its fair share of risk. You’ll have to research the kind of stock you want to buy, research the companies, look at projected yearly earnings, look at the market, and so on. You’ll also have to keep track of expenses like trading commissions and account fees. For people who don’t want this hassle, going with a robo advisor is probably a better choice.
Decide what stocks to sell
If you decide to continue, then it’s time to research. Trying to find “winning” stocks is a strategy that will most likely fail. Even the Oracle of Omaha himself, Warren Buffett, has argued that picking individual stocks is not a strategy he’d recommend.
Instead, it’s advisable to spread yourself out across various industries and sectors and have a manageable number of stocks. You should have a good mix of companies that have historically proven to generate steady, high returns—such as Coca Cola—and companies in sectors like tech.
Choose a platform
Once you know what you want your portfolio to look like, it’s time to choose what platform you’ll be trading on. Will you be doing it the old-school way by selling over the phone or filling out forms with the help of an investment manager or an expensive financial planner? You could take that route, but it would be costly, time-consuming, and potentially inefficient. After all, you don’t have to physically go to the bank to make a transfer now; that’s what the internet is for.
If you choose to trade online, then you have plenty of options to choose from. Plenty of trading platforms offer different perks, but watch out for fees. Some platforms will require account minimums, commission for trades, and charge for additional access to data, financial advice, and helpful resources. Some trading platforms, however, don’t charge you for any of this.
Choose an order type
An order refers to the kind of trade you want to make. The most common is a market order, which is a request to buy or sell a stock at the price it’s currently listed at on the market. The order is usually executed immediately, but if you’re trading a stock that’s active and other trades have been queuing up before you to trade, there’s a chance that the price may have fluctuated by the time your order goes through.
That’s where a limit order may be of more use. A limit order only goes into effect when a stock hits a specific price that you set. This avoids any unwelcome surprises with sudden price changes. The problem with limit orders is that you have to make sure your set price is within a realistic range. If you’ve over- or under-estimated the price, your trade won’t go through.
Make the trade
Now that you know how, what, when, where, and hopefully why, it’s time to play.
If you’re investing online via a trading platform, it’ll be pretty intuitive—basically like online shopping. You’ll have to decide how many shares of the stock you want to sell, what kind of order type you want to make, and whether you want to keep that order active for a set time period. You click “trade” or “place order,” and that's it. You just sold your stock.
When is the best time to sell stock?
Unfortunately, there's no sure way of knowing when to sell a stock. This is because the price could rise or fall after you've made the trade. Each investor decides to sell their stock at different times, depending on personal circumstances and goals. Here are some reasons—good and bad—why you might sell a stock.
When you need liquid cash
From an analytical standpoint, this might not count as a "good" reason, but it's a reason nonetheless. Stocks are an asset, and there are times when people need to cash in on their assets.
Whether it’s seed money for a new business, paying for college, or buying a house, the decision depends on an individual's financial situation rather than the stock itself.
When buying was a mistake
If you think you’ve made a mistake when buying a stock, you should sell that stock, even if it means incurring a loss.
The key to successful investing is to rely on your data and analysis. If that analysis was flawed for any reason, sell the stock and move on.
The stock price might go up after you sell, causing you to second-guess yourself. But a 10% loss on that investment could turn out to be the smartest investment move you ever made.
When you've reached your savings goal
Savings goals depend on an individual's financial situation.
If you’ve hit your savings goal, don’t move the goalposts. Instead, think of what’s most beneficial for future you by taking your gains and moving on.
When the price hits the target you had in mind
If a stock price hits your original target, sell it.
A stock can fluctuate in an instant, so take your gains and move on. Even better, if that stock drops significantly after you sell it, consider buying it again. If the shares continue to increase, take comfort in the old saying, "no one goes broke taking a profit."
When you want to diversify rather than have all your eggs in one basket
At Wealthsimple we’re big fans of the 5% rule. This states that proper diversification means no one investment or sector should account for any more than 5% of an entire investment portfolio. This is how you achieve the cardinal key to investing peace-of-mind: diversification.
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