Strategies for Selling

ANYONE can buy a stock, but the real test of smart investing is knowing when to sell it. Almost from the moment you purchase a stock, you should be thinking about what will be the right time to unload. For many investors, however, selling a losing stock is like shaking some bad habit, It's a painful step you know is good for you, but you keep putting it off. In fact, deciding when to sell a stock is harder and more important than deciding when to buy. If you do not buy a stock and the price rises, all you lose is an opportunity. But if you fail to sell a stock and then the price falls, you lose real money. Here are some guidelines to help you decide what to do when the stock you love no longer loves you back:

Set a goal. You might aim to sell if a stock rises 50% above the price you paid unless you have sound reason to believe it will climb a lot more.

Cut your losses. Never hesitate to sell because you are behind. You could wind up further behind. Consider dumping a New York Stock Exchange issue if it declines 15% from the price where you bought it. American Stock Exchange and over the counter stocks are more volatile, so give them more rope. But sell them if they decline 20% to 25%. You can instruct your broker ahead of time to sell a stock automatically if and when it declines to a certain price. You do this by placing a so called stop loss order every time you buy a stock.

If you bought a stock expecting favorable developments that then do not occur within a reasonable time, bail out. And if the expected does happen, but the price of the stock does not move, unload promptly.

Another sell signal is a sudden spurt in the price/earnings ratio of a stock. This means that buyers are becoming too wildly optimistic. In falling markets, stocks with price/earnings ratios that have soared are likely to come tumbling down if earnings are at all disappointing.

Some advisers suggest you consider selling if a stock's price/earnings ratio rises more than 30% above its average for the past 10 years. For example, if the price historically is about 10 times earnings per share but suddenly jumps to 13, that may be the time to clear out. You can get these figures from a broker or from The Value Line Investment Survey.

If you learn of a significant deterioration in a company's sales growth or profitability or financial health, then it is time to kick the stock out. The same applies if the prospects for the industry that the company is in no longer seem so bright, or if the company itself loses its competitive edge. Sometimes the behavior of the stock itself will tell you that your love affair with it is getting too hot not to cool down. One sign is if the stock market is rising and trading volume in the issue is heavy, but still it fails to advance in price. Another is when a stock is not making gains similar to those of others in its industry.