Novice Investing - 10 Reasons for Selling

Date: Friday 05th 2008f September 2008 05:47:28 PM

10 Reasons for Selling - 09/26/2005

By: Hari Wibowo

During your investing career, you will do these two transactions; buying and selling. Buying requires knowing the fair value of a stock and then compare it with recent price. If recent stock price is 10% below fair value and an investor does not mind getting a 10% return, then he should buy the stock. If not, he can then move on to other stocks.

Selling, however is not that simple. Sometimes, investment do not go the way you want it to be. Your prediction may not be accurate. Furthermore, your time frame may be longer than you expected. Here are ten different reasons investors might sell a common stock:

Need the money. This generally happens due to improper planning. However, things happen. Even the most carefully planned strategy may not work. Catastrophic events such as Hurricane Katrina or Rita may force investors to sell an investment if his household is affected by it.

The book is unclean. When management left their post abruptly or when the Securities of Exchange Commission (SEC) conduct a criminal investigation on a company, it may be time to sell. Your assumption may be inaccurate as a lot of fair value calculation is based on the company's balance sheet, cash flow or other financial statement published by management.

Takeover news. When one of your stock holding is getting bought by other companies, it may be time to sell. Sure, you might like the acquiring company but you still need to figure out the fair value of the common stock of the acquiring company. If the acquiring company is overvalued, then it is best to sell. A good example would be the purchase of Time Warner by American Online (AOL) in 2000. At the time, AOL share price was way overvalued with Price Earning ratio of 100.

Taking Profits Off the Table. Your stock has risen 40% from your purchase price. Your fair value calculation indicates that the stock can rise 10% more. Should you sell? Sure. After all, the goal of every investor is to make money. If you feel that you need to get something off the table, then by all means do it. I am not going to be naive and assume that you should wait for the stock price to rise 10% more. Remember that stock price goes up and down and that fair value calculation has some degree of uncertainty. Would you risk your 40% gain for an additional 10% return? I probably wouldn't.

Other Investment Opportunity. Let's say you bought stock A and it has risen to 10% below its fair value. Meanwhile, you had watched stock B fallen to below 50% of your calculated fair value. This is an easy decision. Go Ahead! Sell your stock A and buy stock B. Our goal as an investor is to maximize our investment return. Sacrificing a 10% of return in order to earn a 50% return is a sensible way to do that.

Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding any securities.

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