Course 504: When to Sell a Stock
Know Why You Own a Stock
In this course
1 Introduction
2 Don't Sell Based on Price Alone
3 Know Why You Own a Stock
4 When You Should Sell Based on Price

So if today's price isn't a good indication of when to sell a stock, then what is? Know why you bought a stock, and why you still hold it in your portfolio. If you bought a stock because you liked the fundamentals, you had better keep an eye on the company to see that these attractive fundamentals remain intact. Unfortunately, it is sometimes tough to distinguish between normal fluctuations of a business and long-term shifts in fundamentals--the trivial from the weighty. If Computer Associates CA misses analyst expectations by a penny because of a change in foreign-exchange rates, for example, you really don’t care unless the company's long-term prospects are somehow impaired. But if there is a fundamental change in an industry or individual company, the reasons you bought the stock may no longer hold true. In 1996 or 1997, you might have bought PeopleSoft PSFT because of its stellar growth and long-term potential. But as the market for such systems became increasingly saturated, growth at these two companies slowed, and they are no longer the growth stories they once were. You may still want to own these stocks, but maybe as value plays, not as stellar growers. You may also sell a stock if you find flaws in your initial analysis. You may have missed something when you were doing initial research on the stock, or there may have been something that you couldn’t have known. Hopefully, if you keep up with your stocks, you will realize your mistake in time to get out of the stock before the price takes a hit. But that's not always the case. Finally, if one of your stocks has taken a big hit (or even a series of small hits) and you're not confident in the company's prospects, be willing to cut your losses and sell the stock. There is no law that says you have to hold onto a loser until you break even. Selling at a loss can also help offset capital gains elsewhere in your portfolio.

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