When Should You Take Profits From Stocks?

T he primary objective of investing in stocks is to make money, but how do you know when it’s time to take the profits on a stock? You need to consider several factors when deciding to take profits from stock, including the fundamental analysis of the company you own stock with and the trading volume of the stock. Explore what to look for when deciding to take profit from stock, what profit-taking means, and how to best sell your stocks to make a return on investment.

Investors should look at a few key factors when trying to decide if it’s the right time to take profits on a stock, including:

  • Fundamental analysis.
  • Trading volume.
  • Target prices.
  • Reduced dividends.
  • Personal financial needs.

What Is Profit-Taking?

Profit-taking is when an investor sells a security, such as stock, in order to lock in returns after it has risen in value. Investors participate in profit-taking for a variety of reasons, with the most common being that a stock has moved above a certain price target, the price of the stock has risen substantially in a short period of time, or the investor wants to use the profits to invest in another security. Some investors may take profits when they notice a company’s earnings report has declined in order to lock in gains and avoid future loss.

Profit-taking occurs in both specific sectors as well as in the broad market. In specific sectors, taking profits is usually triggered by a specific event, such as a promising startup company reporting a lower initial public offering (IPO) than what was anticipated. Broad market profit-taking typically occurs as a result of geopolitical factors or economic data.

While profit-taking certainly benefits the investor who sells the stock, it can have a negative impact on other investors who own the same stock by pushing the price of the stock lower. The lower price can be short term, or it can have a lasting effect on the stock price.

When Should You Take Profits From Stocks?

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Determining when to take stock profits is essential to making the highest returns possible on your investments. But, how do you know when to take profits on stocks? There are a few key factors that may influence your decision to sell, including:

Fundamental Analysis

Fundamental analysis is the process of looking at a company’s financial documents and data. Data to take into account include the business’s asset management, interest rates, revenue, and production. Keeping an eye on the fundamental factors for each company you hold stock with can help you determine when the business is excelling or declining in performance. The primary fundamental factor to consider is the organization’s financial ratio compared to that of other companies in the same industry.

If you find that a company you hold stock in has begun to decline, this may be an indication that you should sell while the profit is still high.

Trading Volume

If a stock you own begins trading at a lower volume than what it was previously traded at, this could be a good indicator that it’s time to take your stock profits before the stock continues to decline. A stock’s trading volume is how many recorded trades the stock has within a certain period of time. The lower the stock volume, the more likely it is to lose momentum as well as interest from other investors and traders.

Target Prices

Setting a target price for your investments is a great way to help you determine when it’s time to take profits on stocks. Most investors will establish a floor price, or the lowest price they’re willing to let the stock fall to before selling it. If a stock hits this floor price, it’s time to sell. You can also set an upper limit price that can trigger your sale of the stock.

Reduced Dividends

If you hold stock in a company that provides dividends to its shareholders, and it suddenly starts cutting or eliminating its dividend payouts, this may be a good indication that it’s time to sell your stock with that company. A company cutting its dividends is a serious event and can signal significant financial trouble within the organization. Selling your stock before these financial issues affect the stock prices ensures a profit.

Personal Financial Needs

While not always the best reason to sell stock and take profit, personal financial needs is still a reason why many investors choose to take stock profits. Whether you need the funds to support a new business, fund your child’s education, or buy a new home, selling stock can offer a great way to obtain cash. This reason for taking profit on stocks is based on your individual financial situation rather than on the fundamentals of the stock.

It’s important to note that I’m not a stockbroker or advisor and therefore can’t make recommendations as to when the best time is for you to take profits from stocks. But, by analyzing these factors, you should be able to get a pretty good feel for when the most appropriate time to take stock profits is for your unique goals and situation.

How to Take Profits From Stocks

When you’re ready to sell your stocks, you have a couple of options:

Selling Stock Through a Broker

If you already have a broker account, you’ll be able to directly sell your stock through this account. If you don’t have a broker and think it might be a good route, consider a few factors, such as whether you want to be more active or passive, how much the broker charges in fees, and what sort of trades you want to take part in. Choose the best broker based on your research, and then take your physical stock certifications to the broker to put into your account.

Once your stock is transferred to the account, you can select a price level and put in a sell order for your stock, or you can simply sell your stock at the market.

Depending on how much you want to make from your stock sale, you can either enter a Good ‘Til Canceled (GTC) order or enter day orders each day until you sell your stock for the price you want.

Selling Stock On Your Own

If you want to sell stock on your own, you’ll need to get familiar with the different types of sell orders:

  • Market sell order: This type of order lets you sell your stock immediately and guarantees the order will be executed without having to specify the cost of the execution. Market orders are often filled near or at the bid price, so you should get the price you want with this type of order.
  • Sell stop order: This type of order is set up to trigger a sell once a stock’s value goes below the prevailing market price (stop price). When the market price reaches the stop price, the sell stop order will turn into a market sell order and sell the stock at the best available price.
  • Trailing sell stop order: This type of order is similar to a sell stop order but its price is automatically adjusted based on parameters you set as the market continues to rally.
  • Limit sell order: This type of order allows you to sell stock at a specific price or better.

In addition to using sell orders to sell your stock for a profit, there are a few other profit-taking methods traders can use: short selling and buying put options.

Short selling is a strategy in which your broker borrows stock for you to sell with the expectation that you’ll buy back the stock when its price declines. Buying put options on a stock entails purchasing a put option that gives you the right, but not the obligation, to sell a set number of shares for a certain price (strike price). This is a good strategy if you want to pay less than you would to put up a short stock.

Knowing when to take profits on stocks is essential to a healthy portfolio. Taking the time to educate yourself on the best ways to sell stock and the right times to do so ensures you make the most beneficial choices for your investments.