When should you sell your stock holdings?

One of the mistakes that many people make when starting to invest in stocks is the practice of selling shares for a small profit and continuing to buy and sell from time to time. When the shares make a profit of two to three per cent, the selling method is more costly. The method of managing the portfolio from time to time buying and selling incurs various costs such as fees and commissions. Frequent trade expenses, including brokerage and other charges, can lead to a fall in return on investment. Selling after holding shares for less than a year will also lead to short-term capital gains tax.

There is a high risk in equity investment. This is what drives many people to sell out when they make a small profit. Occasional buying and selling of portfolio stocks to manage risk may defeat the goal of long-term investment success.

Deciding to sell a stock based solely on the purchase price is a wrong approach. Just because you got good returns, you need not sells off a share. If the company is on the right track, the graph of the stock will be up. Profitability should only be considered if there are adverse factors affecting the growth of the company. Shares of a company that is growing in the right direction will continue to perform well. Short-term profiteers should conduct such trades on the basis of technical analysis.

The investor needs to evaluate the factors that adversely affect a company and how an event or problem may affect the company. If you are approaching the stock market not just to do ‘intra day’ trades, you need to do some minimal research and include the long term potential of equity investment.

If you are thinking about making a profit based on the purchase price of the stock, you need to examine if the stock is currently expensive. The decision should be based on criteria such as share price and earnings per share. The ratio between the share price and the earnings per share should be compared with the current average and the current ratio – to determine whether the stock is expensive.

Ordinary investors often choose stocks based on their price. Investors who are interested in buying cheaper stocks often do not check why the price has dropped or how much the company’s management is maintaining quality. The value of a stock is something that should be considered only after realising these three factors of a company: whether the business, financial position and management are excellent. It is not the right way to invest just because the first three factors are not sound and the cost is low.