When to Dump a Stock

Photo of author

By Jacob Maslow

Brokerages are fast to sell you on a stock, but offer little help when it’s time to sell your stock and cash out. Knowing when to dump a stock is one of the biggest hurdles for investors. Long-term investments are meant to be held onto for the long-term, but any stock can take a turn for the worse and lose an investor money.

Emotion must be removed from the investment process. Stocks are investment tools, and setting key profit and loss limits on a stock is a smart option for new investors. This allows you to know when to sell a stock to earn a profit.

And, it’s essential that once you sell the stock, you don’t regret your decision as the stock rises further in the years or decades to come.

General Motors is a prime example of a company that has had stock fluctuations over the past three years. In July 2012, the company’s stock dropped to $19 a share. Many investors sold the stock when it was declining to ensure they did not fall into the red. The stock is now trading at $35.50 a share at current day prices. This isn’t as high as what we saw in January 2011, but it has risen greatly over the last three years.

Investors that sold the stock while it was on the decline cannot regret their decision if they sold at a profit. Stocks are meant to fluctuate, and selling with a max loss and profit will allow you the comfort in knowing that you either didn’t lose too much money, or that you actually made a profit off of the stock.

There are many signals that advanced investors will look for to determine when it’s time to dump a stock.

Never Allow One Stock to Overtake Your Portfolio

No one stock should take over 5% to 10% of your portfolio. The goal is diversification in both stock and industry. Selling a stock slowly is recommended if it begins to account for too much of your portfolio’s value.

Major Changes in Company Structure

A loss of a prominent CEO or troubling financials may be a sign that it’s time to sell a stock. That said, companies can survive without a major name, such as Steve Jobs, running the company. Steve Jobs is a prime example of a CEO that set up his company, Apple, for the future by grooming his replacement before stepping down.

But if the company’s financials, revenue and earnings growth specifically are tumbling, it’s a good idea to sell while you’re still in a profitable range.

Analyst’s Predictions of Downward Trends

Analyst predictions are a tool that investors can use to analyze a market and a company. These experts will provide earnings and growth estimates for a company. When estimates are moving downward over several quarters, this can down the company’s stock, causing you to lose money in the process.

It could also be an indicator of a company that has reached its maximum growth potential. Go Pro Inc. (GPRO) is a company that many analysts believe will not be able to hold their high stock value because the company is built on one product. The company stock has fallen greatly in the last three months from $62.88 a share on August 6th to a current price of $29.54 a share.

Investors that followed analysts’ predictions would have been able to sell their stock before it declined by more than 50% in a quarter.

Analyzing the company’s stock, management and earnings will provide you with information that allows you to dump the stock before its value drops into unprofitable ranges.

Images Courtesy of DepositPhotos