In the previous article we discussed stock price life cycle events and alerts. In this article we'll look at events and alerts that help answer the question "when to sell a stock?"

It is always a good idea to put some thought into stock-selling before buying a stock, by selecting the right investment strategy for that stock ('passive', 'peak', 'gain', etc.). The strategy will then drive our 'sell' decision and thus take the guesswork (and any emotional reactions) out of the question.

Let's revisit the stock price life cycle events and alerts related to selling:

• Loss alert tells us that the stock price has dropped to below our purchase price. This means that we're definitely losing money right now. Unless we decide that the drop is a due to a temporary market blip which will be set right soon (i.e., not due to anything related to the underlying company), we typically would want to sell and prevent further losses.
• Gain alert notifies us when the stock price has risen to meet our expected 'gain' criteria. We could decide to sell now while the going is good. Or, we might do nothing and let the price (hopefully) increase further. As we saw earlier, this has both pros and cons: at this point, the stock has provided real gains, and so might be worth selling. On the other hand, if stock price does go up further, we will be missing out on any additional gains if we sell now. Similarly, if we don't sell now and the stock price drops subsequently, we'll be losing what we gained. If we chose the 'gain' strategy for a specific reason, it is good to not let greed cloud our decisions.
• Peak drop alert informs us that the stock price has dropped and hit the 'peak drop threshold'. For the 'peak' and 'gain' strategies, this usually is an indication to sell.
• Plateau alert: we get this alert if the stock price is staying still or rising too slowly for us to believe that we'll make our expected annual gain. But, it doesn't necessarily mean that we should sell this stock now. It might be that even though this stock isn't doing as well as expected, it's still going up (albeit slowly) and some of our other positions more than compensate for this slow growth. Or, it might be that there are no other qualified stocks to invest in at this time. In either of these cases, we could decide to stay invested in this stock.

When using the 'passive' ('buy and hold') strategy for a stock, we typically choose to ignore any 'gain' or 'peak drop' alerts for that stock and hold on to our stocks as long as possible. We sell only when we need the money or if the growth has plateaued.

Taxes

We mentioned taxes when we discussed stock trading simulation. Any profit made from selling stocks is potentially taxable, so taxation should always be in the back of our minds when we think of selling. To fully understand the effect of taxes on stock sales for your specific situation, please contact your financial advisor and tax planner.

Trading Fees

Similar to taxes, the act of trading itself may incur some fees. Depending on the brokerage we use to trade, we may need to pay a fee per-trade. Some brokerages allow a certain number of free trades per month, and a few even offer unlimited free trades. If we make a lot of trades that result in minute gains but pay a high trading fee for each trade, we might actually be losing money! Check your brokerage's policies and statements to factor that in our net gain.

Summary

The decision to sell stocks is very personal and subjective, and depends on the answer to various questions: "what is our strategy?"; "do we need the money now?"; "is the price drop real?"; "are there other stocks worth investing in, right now?"; and so on. Each person needs to decide this for themselves (with help from their financial advisor), and select the strategy that maximizes our gains.