A useful guide for when to sell stocks is to look at the flip side of when to buy stocks. In establishing the concept of value investing Graham Green taught that the investor should analyze a company and come to an opinion as to its real value. This was the beginning of fundamental analysis instead of pure speculation for many stock market investors. The opposite side of buying stocks, because their real value is far above their stock price, is selling stock when its real value has dropped. In this case there is no longer a margin of safety between the real value or intrinsic value of the stock and the stock price. There are several ways to look at a stock to see if its intrinsic value warrants holding it or selling. The ideal situation for many is that stock investment is always a matter of long term investing. Thus fundamental analysis outweighs technical analysis, the investor only pays a commission when buying, and the company prospers forever. Because this is mostly not the case we are taking a look at when to sell stocks.
Picking Winners and Avoiding Losers
There are stocks that you want to own and stocks that you do not want in your stock portfolio. If you are looking for stocks with high real value or intrinsic value you can start by looking for securities whose shares appear underpriced by analysis of company fundamentals. Stocks that are trading at a discount to book value, have a high dividend yield, have a low price to earnings ratio or a low price to book ratio. The concept of intrinsic value looks at the discounted value of all future distributions. Because there is investment risk in all decisions many successful value investors look for very good companies that are underpriced and not penny stocks with promise. The idea is to adhere to a margin of safety. The basis of knowing when to buy and when to sell is that the investor needs clear and accurate information. Lack of clear information is, for many, when to sell stocks.
Picking the Precise Time to Sell
For the strictly long term buy and hold investor when to sell stocks is when the margin of safety between a stock’s intrinsic value and its market price no longer exists. Entire market sectors can become bad investments at the current price with a recession, changes in technology, and stock market crashes. In a bricks and mortar, heavy industry, trucking company, oil company world this decision can be anticipated. The decision comes much quicker in a world of computer software, genetic engineering companies whose value resides in the skills of their employees, and non-competitive companies whose value skyrockets when a takeover bid surfaces. This is where technical analysis and Candlestick basics enter the picture.
It is during these times at the use of technical analysis tools such as Candlestick chart analysis is important as it will allow an investor to anticipate market sentiment and know when to sell stocks before the company’s stock price plummets. Because much of the support for long term value investing comes from data during periods of largely sustained economic growth in the USA it is wise to consider how to approach investing in a somewhat flatter market promised by the 21st century. In a world where stock values may fluctuate a lot but not rise, or fall, over the very long term, trend trading or looking for market reversal with the use of Candlestick pattern formations for trading rather than long term investing may be preferable. Nevertheless, even in the short term, it is wise to remain aware of what gives stocks value in order to know when to sell stocks.
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