Selling a stock can have serious financial ramifications, so it’s not a move you want to make lightly. You need to make sure you’re clear on your own motivations for selling and the effects the sale will have on the rest of your portfolio before you go ahead with it. Here are a few questions to ask yourself.
1. Why are you selling?
People can have different motivations for selling stocks and they’re not all equally good. Selling off a poorly performing stock because you’d like to harvest the capital losses to offset some of your capital gains can be a smart, tax-saving move. But selling off a stock because it’s had a rough quarter and you’re afraid of losing money usually isn’t a good idea.
Short-term ups and downs happen even when you’re investing in strong companies. They’re usually not anything to panic about unless you feel you aren’t diversified enough. If that’s the case, it might make sense to either sell some of your shares or earmark some more money for investing in other stocks to balance out your portfolio.
If you haven’t already thought about it, ask yourself why you are selling now. If it’s part of your tax loss harvesting strategy, make sure you understand the rules surrounding this. You can’t sell the stock to claim a capital loss and then buy it right back again. That’s called a wash sale and it will land you in trouble with the government.
If you’re worried about the stock’s short-term performance, ask yourself how you feel about its long-term performance before you sell. More on that below.
2. How long have you owned the stock?
When you sell a stock, assuming you’ve made a profit, you could face capital gains on your earnings. But how much you’ll owe depends in part on how long you’ve held the stock.
Shares you’ve held for one year or less are subject to short-term capital gains tax while those you’ve held for longer than one year are subject to long-term capital gains tax. Short-term capital gains tax brackets are the same as traditional income tax brackets, but long-term capital gains tax brackets are a little different. The highest possible tax bracket is just 20% (compared to 37% for short-term capital gains) and some people don’t owe any long-term capital gains at all.
To get a sense of exactly how much you could owe taxes on, you need to know your tax filing status and your annual income. Here’s a guide to capital gains tax to help you figure this out.
Whenever possible, try to hold on to your investments for over one year before selling so you can take advantage of the lower long-term capital gains tax brackets. If this isn’t possible, you should at least be prepared to lose a larger portion of your earnings to taxes.
3. Where do you think the company will be in 10 years?
While poor short-term performance isn’t usually a great reason to sell a stock, concerns over long-term performance often are a good reason. If you see a company that’s steadily losing market share to a competitor, that could be a sign that it’s not doing so well.
If you ask yourself where you think a company will be in 10 years and you believe there’s a chance it’ll be out of business by then, that’s a sign you probably want to get out. But if you think it’ll be doing great in 10 years, you should probably hold on to that stock, even if it hasn’t been doing so hot recently.
There’s no way to guarantee that selling a stock at any given time is the best decision for you. You could sell and miss out on huge gains if its share price skyrockets the next day. Or you could save yourself from huge losses if it tanks. There’s no way to know for sure. The best you can do is make decisions with your long-term investing strategy in mind.
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