The stock market survival guide - V

Know when to sell.

One of the most common mistakes, novice investors like me make, is around timing the sale of stocks. Of course it is almost impossible to time the market. There are however a few points that can help make good decision.

1. There are times when certain stocks show sudden bullish trend on the basis of news which creates a positive sentiment. In such a situation most broker recommendations put a buy rating against the stock (which of course has led to the sudden rise in the stock price).
The temptation to buy will be immense. It is important however to check if the fundamentals of the company have changed significantly. More often than not, news is only news and does not actually indicate significant change in fundamentals. In such a situation, it is important to not succumb to the temptation to buy. Instead, if you happen to already have the stock in your portfolio this sudden bull run might present a good opportunity to sell.
The exact opposite holds true with respect to bearish news (especially on stocks with strong fundamentals). Bearish news may present good opportunity to buy.

2. Look for the Company story. Whenever you invest in a company, it is important to note that you are not investing in the company but in the story. If the company is a consistent performer with the results and the growth indicators are positive then the chances are that the company will do well in the coming future and therefore its a good time to buy the stock.
However if the indicators of profitability indicate decrease in profits in coming future then it is time to switch out of the stock.
In such a situation even if the long term potential of the company is good (indicating that the company will eventually improve on profits) the short term indicators mean that it may be a time to sell and then buy the stock at lower levels.

3. Set your targets. Whenever you buy a stock, it is useful to set target sell price as well as time frame. That way when the targets are reached, the decision to sell should be straight forward, unless of course the fundamentals of the company have changed indicating a need for revising the targets.
In the same situation if there are indicators that the stock may not meet its target (negative news, decrease in profits etc) then its time to sell the stock and book whatever profits (or losses ) are available, rather than loose money on the stock.