When to Sell Your Stocks: Whether for Profit or at a Loss
Investing is likely a cornerstone of your wealth-building plan. Saving for retirement is virtually impossible without investing in one form or another.
You may even invest for mid-term goals that are five, ten, or more years in the future. This could include your child’s college costs, purchasing a new car, or a once-in-a-lifetime vacation.
Chances are, you’ve built or are building an investment strategy to help you reach those goals. But one part of that plan can be difficult for most people to define. That’s figuring out when to sell stocks.
Obviously, the answer to the question isn’t a straightforward one. It depends on your investment plan, goals, timeline, risk tolerance and much more.
Understanding the impacts of selling stocks and your potential options can help you develop a plan.
Here’s some information you may want to know to help you figure out when to sell stocks in your situation.
Common Reasons to Sell Your Stocks
You may want to sell your stocks for any one or more of a list of good reasons to sell.
What’s important is that selling your stock fits within your investment plan.
Here are some common scenarios that may require you to sell stock.
No more opportunity
When you buy a stock, you likely see an opportunity for it to provide a benefit to you in the future. This may be a dividend payment or growth in the stock price.
At some point, you may believe the future opportunity the stock provides does not outweigh the risk of holding it. Once you reach this point, you may decide to sell the stock.
This could happen if the stock reaches your price target. Alternatively, it may occur if the stock stops offering dividend payments or fails to increase its dividend payments.
Companies sometimes change leadership or strategy for how they plan to achieve their goals. A new CEO may take over the company and implement a new vision.
If the new potential future for the company doesn’t provide the opportunity for the growth you need, you may want to sell the stock.
Some stocks perform better under particular economic conditions.
For example, growth companies usually outperform when the economy is growing.
Income-producing companies, such as utilities, often receive an influx of investment during poor economic growth periods.
As the economy and stock markets change, you may decide to sell stocks and buy other stocks to meet the new reality.
Be careful when doing this, though. Reactive trading, rather than proactive trading, could result in less than optimal results.
Rebalancing your portfolio
Having a diversified portfolio is key to minimizing risk. A portfolio can become unbalanced over time, though.
To fix this, buying and selling stocks may be critical. Rebalancing allows you to sell winning stocks you have too much of to buy stocks you don’t have enough of.
Tax-loss harvesting opportunities
Tax rules allow you to offset capital losses against capital gains.
You may decide to sell stocks at a loss to lower your tax liability. This is called tax-loss harvesting.
Withdrawing funds to achieve goals
Your investments exist to help you achieve your goals. Once you reach those goals, you eventually start selling investments to fund those goals.
For example, someone that has invested in stock to retire will need to start selling stocks to provide income in retirement.
Invest in something else
Selling stock to fund other investments or expenses may be a legitimate possibility for you. Life isn’t as predictable as some people would like.
While you may have invested in a stock with plans to not sell for the long-term, sometimes things change.
For example, your dream home could pop up on the market a few years before you had planned on buying a house. In this case, you may decide to sell your stock to fund a down payment for your dream home.
Another example is the opportunity to start a small business. If you need money to make it happen, selling stock may provide that needed capital.
Market Hours and Order Types Used to Sell Stocks
Most people trade stock during market hours. These hours may vary depending on the exchange your stock is traded on. Most markets trade on weekdays except for certain holidays.
After-hours trading may also be available but may be more costly depending on the brokerage firm you use. This could potentially include weekend trading, as well.
You can use several types of orders to sell the stocks you hold. Here’s a quick summary to help choose which may work best for you.
A market sell order instructs your brokerage firm to sell at the current price. Markets move quickly, so the price you see may not be the price your market order settles at.
Sell limit order
A sell limit order helps you make sure you get the money you want for your stock. This instructs your brokerage to sell your stock at or above your specified price. If the stock does not hit the price target, it does not sell.
Sell stop-loss order
A sell stop-loss order prevents you from holding a stock once its price falls below where you are comfortable.
It instructs your brokerage to sell the stocks once they reach the stop-loss amounts you set. Then, the firm sells the stocks at the market prices, which may be below the stop loss order price.
Determining Cost Basis When Selling Stocks
Your cost basis is normally the amount you paid for the stock you’re selling. Chances are you own more than one share of the stock you’re selling, though.
If you aren’t selling your entire position, how do you determine the cost basis of the specific shares you sold?
This partially depends on which cost basis methods your brokerage supports. Here are some of the common choices.
First in, first out (FIFO)
"First in, first out" means the first shares of a stock you buy are the first shares of stock you sell.
If your stock’s price has steadily increased, this can lead to significant capital gains. Depending on your situation, this may also result in a large tax bill.
The opposite is also true. If your stock’s price has consistently decreased over time, selling the first share you bought results in the largest loss. This could provide tax benefits.
The FIFO method may help you take advantage of lower long-term capital gains tax rates, assuming you’ve held the first shares for more than a year.
Last in, first out (LIFO)
"Last in, first out" works the opposite of first in, first out. The last share you purchased is the first share you sell.
This could create issues because you may not benefit from the long-term capital gains tax rates unless your last purchase was over a year ago.
If stock prices have been rising, this will result in a smaller gain than using an older stock with a lower cost basis.
That said, you’ll have to pay the taxes on that larger gain when you eventually sell those old stock shares.
The opposite is also true for a stock with a declining stock price over time. You recognize the smallest losses upfront using this method. Then, you realize larger losses as you sell the older stocks.
The ideal identification method requires the most work but also gives you the most flexibility if your brokerage allows it.
Specific identification allows you to identify the exact shares you want to sell when selling stock.
This allows you to choose whether you want to sell a stock with a long-term gain or loss or short-term gain or loss.
Because you can identify the cost basis of individual shares using this method, you basically get to choose the amount of the gain or loss.
As you sell shares using this method, you cannot sell them again. This means future stock sales may be limited based on the remaining inventory of shares and their respective cost basis.
Careful planning using this method can help you optimize your tax situation, though.
Don’t Forget About Taxes
Selling stock may have tax impacts depending on where the stock is held.
Stock held in tax-advantaged retirement accounts
Stock held within a tax-advantaged account, such as a 401(k) or IRA, won’t likely result in taxation immediately.
This is because these accounts allow earnings to grow tax-free. This includes dividends as well as earnings from selling a stock within the account.
You may have to pay taxes when you withdraw money from the account in retirement. This depends on your specific circumstances and whether the account is a Roth or a traditional account.
Stock held in taxable brokerage accounts
If you hold stock in a taxable brokerage account, selling stock may result in tax impacts.
If you sell a stock for less than you paid for it, you generally don’t have to pay taxes. Selling stock for more than your cost basis in the stock may result in taxation, though.
When you sell stock at a gain, the type of tax you pay is a capital gain tax. This is because stocks are considered capital assets.
There are two types of capital gain taxes. These include short-term and long-term capital gains taxes.
If you hold a stock for a year or less, you pay short-term capital gains tax rates. These are the same as your ordinary income tax rates.
People who hold stock for more than a year pay taxes on gains at long-term capital gains tax rates. These are lower than ordinary income tax rates. This benefit incentivizes you to hold stocks for a year or more before selling.
Consult a Professional Before You Sell
Figuring out when to sell stocks can significantly impact your returns and your tax situation. Once you sell a stock, the tax impact is locked in. For these reasons, it’s often best to consult a professional before you sell a stock.
Tax advisors, such as Certified Public Accountants (CPAs), can help advise you of the tax impacts of selling. A financial advisor can help you determine whether it’s a good time to sell an investment based on your financial plan.
Ideally, you want to speak with a fiduciary fee-only financial advisor as they don’t receive commissions when you buy and sell stocks. They must also provide advice on financial topics that is in your best interests.
Consulting a personal financial advisor before you sell gives you the best opportunity to maximize your investment plan and tax situation.