Key Indicators for Knowing When to Sell Your Shares in the Stock Market
- Ogechi Aguma
- Jan 12
- 7 min read
Updated: Feb 1
Before answering this question, envision your stock investments as seeds that you carefully selected, placed in ideal locations, planted, and that have now grown into trees.
If this perception is deeply rooted in your mind, the question becomes: When will you trim it? Should I cultivate more similar ones? When is the right time to remove it? This is intended to emphasize the gravity of your question. So, when should you proceed with these actions?
Q1: Fruits No Longer – Declining Profits, Revenues, and Growth
Over time, if a company's business model lacks the strength to adapt to changing circumstances, it can stagnate. The company may remain operational, but without growth and profits for you, the investor. If the company's fundamentals, financial health, and board management structure are weak or lack direction, reducing your profits or losses can help preserve capital for better investment opportunities. Clinging to hope may result in missed opportunities when all indications suggest a barren future.
Illustration:
Imagine you invested in a retail company that thrived during the brick-and-mortar era but failed to adapt to e-commerce trends. Despite being a market leader once, its revenues and profits have been declining steadily. The management seems unable to pivot the business model to online sales, and the company's debt is increasing. In such a scenario, it might be wise to sell your shares and invest in a more forward-thinking company.
Q2: Excessive Fruit – Yearly Growth and Return on Investment are Skyrocketing
Most stocks of value companies, when invested over the long term, do give outstanding returns. Conservative examples of over 2000% profit do exist (remember, time and patience play a major role here). Year-to-year growth is improving and consistent. Your profits are now in the compound interest momentum. The thought of taking some profits could be a valid reason to trim your shares.
If you have too many ripe fruits hanging, it’s not unwise to pluck (sell some shares) and reinvest in other discounted, undervalued, or upcoming growth stocks. Trimming and rebalancing your portfolio is a sensible and welcome strategy to growing your investment. On the flip side, keeping over the long term, if growth is consistent, will obviously pay much more dividend.
Illustration:
Suppose you invested in a tech company that has seen its stock price soar by 3000% over the past decade. The company's growth shows no signs of slowing down, but your portfolio is now heavily weighted towards this single stock. To manage risk, you might sell a portion of your shares and diversify into other promising sectors like renewable energy or healthcare.
Q3: Infrequent Fruits – Irregular Earnings
When earnings of a company are slow and vary widely, profits are far and few between with no consistency. This may indicate another time to trim. Although one will need to be careful here. A detailed investigation is recommended on why the varying swings. It may be as a result of expansion leading to deepening of the company’s debt or purely due to poor business management. So, some digging to ensure you are making the right move.
Illustration:
Consider a biotech firm that has promising products in its pipeline but has yet to achieve consistent profitability. The company's earnings are erratic, with significant swings due to research and development costs and regulatory hurdles. If you notice that the company is struggling to bring products to market and its debt is increasing, it might be time to reassess your investment.
Delve Deeper:
Market Conditions: Sometimes, external factors such as economic downturns, changes in industry regulations, or increased competition can impact a company's earnings. For instance, a company in the oil and gas sector might experience fluctuating profits due to volatile oil prices. If the company cannot stabilize its earnings despite market conditions, it might be a sign to sell.
Management Decisions: Poor management decisions can lead to inconsistent earnings. This could include failed mergers and acquisitions, poor product launches, or ineffective cost management. For example, if a tech company repeatedly fails to innovate or launch successful products, its earnings might suffer, indicating a potential need to sell.
Debt Levels: High levels of debt can strain a company's finances, leading to inconsistent earnings. If a company is taking on more debt to finance its operations or expansion but is not generating sufficient revenue to cover its interest payments, this could be a red flag. For example, a retail company expanding rapidly by opening new stores might face inconsistent earnings if the new stores do not perform as expected.
Operational Challenges: Operational issues such as supply chain disruptions, production inefficiencies, or labor strikes can lead to inconsistent earnings. For instance, a manufacturing company facing frequent production halts due to supply chain issues might struggle to maintain consistent profits.
Sector-Specific Risks: Certain sectors are inherently more volatile and prone to inconsistent earnings. For example, companies in the mining sector might face fluctuating earnings due to changes in commodity prices. If you are invested in such a sector, it's crucial to monitor these risks closely and decide whether the potential rewards justify the volatility.
Illustration:
Suppose you invested in a renewable energy company that initially showed great promise. However, over the years, the company's earnings have been inconsistent due to fluctuating government subsidies and competition from other energy sources. Despite the potential of the renewable energy sector, the company's inability to stabilize its earnings might prompt you to consider selling your shares.
Q4: Disease Infestation – Fraud
The second you hear rumors or any scent of this, investigate quickly, sell, and run.
Legit companies start up right with good intentions. They provide great products and services to clients with satisfied investors. Then the competition gets stiff, the chase for the limelight kicks in, and when not carefully managed, the disease of ‘Fraud’ ensues. Unknown ‘accounting zeros’ start getting added or missing from the books and the very ‘tree sap’, in other words, ‘integrity’, that keeps earnings production flowing ceases to exist. Investors' confidence is eroded, leading to the ultimate death of the company.
At this point, the tree is chopped with losses. Before this happens, you want out and hopefully able to redeem as much of your investment as possible.
Illustration:
Enron is a classic example where fraudulent accounting practices led to the company's collapse. Investors who acted quickly on the early signs of financial irregularities were able to salvage some of their investments, while those who held on faced significant losses.
Q5: Personal Needs – To Take Home
Planned and unplanned personal needs do arise. With investments that are generating good returns, trimming some profits to fulfill personal financial goals is needful. Paying off debts (mortgage, car loan), valuable home upgrades, payment of tuition fees for your kids, offering a helping hand to others in need, supporting good causes are all benefits of investing, hence a worthwhile move to trim.
Point to note, it’s trimming, not chopping down. Unless in extreme circumstances to meet a particular need, it’s only wise to keep the tree producing profits while you take some of its fruits to satisfy needs. This is entirely your call, remember, it’s your money.
Illustration:
You might have invested in a blue-chip stock that has provided steady returns over the years. Now, you need funds for your child's college tuition. Selling a portion of your shares to cover this expense is a practical decision, allowing you to meet your financial obligations without completely liquidating your investment.
Q6: Shift in Appetite – Core Business Transformation or Change
Some companies evolve, hence changing their core business model and focus, and this may not be in line with your goal or even risk appetite.
The company performance is still great, but the new direction of the company is not just your forte. Selling off and moving on to other investment opportunities is not unwise. Warren Buffet will always say, ‘invest in what you know’.
On the other hand, you may decide to shift your investment to another sector or investment opportunities because you are evolving. Your views may change on the current business you are invested in and now find other opportunities more attractive. Liquidating your shares and moving on is then justified.
Illustration:
Suppose you invested in a traditional energy company that has now shifted its focus to renewable energy. While the company's prospects are still strong, you might prefer to invest in a different sector, such as technology or healthcare, that aligns better with your investment goals and risk tolerance.
Inspirational Quote to Drive Your Actions
“Many people take no care of their money till they come nearly to the end of it, and others do just the same with their time.”
Johann Wolfgang von Goethe
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Hargreaves and Lansdown. Take a look at their fees.
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Counsel
Always try to buy stocks when they are on SALES! (basically when there is a dip in the share price).
Drip feed your investments. Share prices vary day to day especially in times economic crisis, high volatility becomes a common theme. In the same vain, be watchful of purchasing fees.
Investopedia is a great website to help you with understanding almost any financial terms and definitions.
Disclaimer
Note: Shares and Investment Lifestyle website is only for information purposes. Please do your detailed research. Any investment decision taken will solely be your responsibility. You can get back more or less capital than you invest.
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