Why is it important to sell your shares at the right time?
First, let's take a moment to understand why it's important to determine the best time to sell your shares. Indeed, as you probably know, the moment of buying your shares, most often at the best price, i.e. the lowest price, is an important choice in your investment strategy. But it is just as important, or sometimes even more important, to know when to exit your holdings, although it is clear that a wise choice of both market entry and exit will be the most intelligent strategy.
Buying a stock at the right time and at the right price will indeed allow you to generate profits, but it is by selling this stock that you will actually take this profit. While the saying goes that a stock that is held is not a loser, it is not a winner either and does not generate any capital gain as long as it remains in your portfolio except for the dividend.
Many traders hold on to stocks that are believed to have unrealised capital gains but cannot decide to take profits at the right time. Eventually, the stock reverses its trend and these traders end up with negative positions. Similarly, traders may hold on to a falling stock in the belief that it will rise again and end up with an even greater loss.
Knowing how to sell your shares at the right time is therefore a prerequisite if you want your positions to be profitable with stock market investing.
Good knowledge and excellent strategy: Two indispensable elements!
The first piece of advice we can give you about when to sell your shares is to make sure you have sufficient knowledge and experience of investing in the stock market. It is then important to have a strategy that you will stick to. If you have set a target price for your share that you think is attractive, you can decide to sell it as soon as you reach it and not get carried away by the temptation to wait for the price to rise further. Psychologically, this can be very dangerous because the more the share price rises, the more you will be locked into this strategy.
When your stock starts to reverse this trend and loses a few points, you may experience this as a disappointment even though your position is still largely winning. You will then unconsciously hope that the stock will regain the high level reached previously and hold it despite this warning. Of course, this is an extremely dangerous strategy because in most cases, this bullish recovery does not occur. The sell signal is present and your stock will continue its downward trend until you finally decide to sell, usually below your initial target. Sometimes this decision to sell even happens just before the stock finally begins a major rebound.
In this case, it was your emotions that guided your choice. Emotions do not lead us to rational behaviour. This is what happens most often with gambling. The result of not controlling your emotions is a gain lower than the objective you set beforehand, or even a loss. It is therefore important to know how to seize a selling opportunity when it arises and not to expect too much from a position that is gaining in value.
All experienced and profitable investors will tell you: Knowing how to take your profits at the right time without expecting more is one of the keys to success in stock trading. Without this ability, you won't survive long in the jungle of the financial markets. Even worse, not reacting in time by selling your shares without being greedy can lead to very large financial losses.
Know when to take a stand:
While it is obvious that good stock trading is based on the ability to invest in a stock at the lowest possible price and sell it when the price is at its highest. But this is without taking into account the unpredictability of the financial markets. Indeed, it is strictly impossible to predict with precision all the movements of these markets. Here, it is the right timing that you have to try to find in order not to make any mistakes.
Again, one of the most common mistakes made by less experienced traders is to try to buy at the low price and sell at the high price. To avoid this mistake, you need to be able to spot trend changes and therefore have some experience in stock market analysis.
It is never possible to know when a trend will end or reverse and only your experience and strategic ability will make the difference.
What are the situations in which shares are most often sold?
By studying the buying and selling of stocks on stock charts, we can observe specific market reactions to certain situations. In other words, a large proportion of investors sell their shares at the same times. Let's find out about these events together.
Of course, if you find that you have made a mistake in your prior analysis of the stock you have bought, this calls into question your entire strategy and makes it much less relevant, or even dangerous. Therefore, if the elements that led you to buy your securities are no longer verified, do not expect them to become so afterwards. Respecting your strategy is the basis of any success in the stock market. So if you discover that you have made such a mistake, you can choose to sell your shares without trying to maximise your gains.
It is of course possible that you will be disappointed afterwards that you did not hold on to your shares if they end up going up, but you can reassure yourself that this was not part of your strategy and that this may, in the end, lead to a more or less significant loss. It is indeed preferable, in case of an analytical error, to assume a small loss than a larger loss leading, for example, to the total loss of your capital and the inability to rebound afterwards. On the contrary, in this particular case, it is wise to learn from your mistakes.
One of the cases in which we see heavy selling of stocks is when the price of the stock rises volatile. Many traders, when they see a sudden rise in the price of your stock, are humbled and immediately sell the stock. This is because the most important uptrends are often the shortest, which is a danger. Here, experienced investors often prefer to take their gains and eventually buy back these stocks when the downward reversal has taken place and implement the same investment strategy. In any case, a small gain is still a gain and is worth taking.
Finally, the last situation that often leads to the sale of shares concerns the fact that the valuation of a company is no longer defined by the price of its shares. Indeed, although we can consider that the valuation of a company is a concrete and mathematical element and that the price of a share will, at one time or another, be the result of this valuation, it remains uncertain from a certain point of view and nothing is won in advance. It is indeed known that in the stock market, nothing is predictable. It may therefore be risky to sell a share because it is overvalued in relation to a competitor, or to buy a share that is less valued than the others. Indeed, the over- or under-valuation of a share by the market is not necessarily well-founded and the real economic situation of the company will often end up taking the advantage. It is indeed possible and even common for stocks to be worth much more than their future earnings and continue to rise until the market finally values them at their true worth. Experienced traders follow the valuation of the companies they invest in very closely and watch for a new record high valuation and wonder if it represents a bubble. If so, most decide to sell as soon as possible before the bubble bursts.