How do you decide when to sell your shares in the stock market?

Knowing when to sell your stocks is the factor that decides whether you will achieve all your financial goals or not. To avoid making mistakes, it's better to think twice before buying, to study the company before investing in them and to also keep a check on those stocks you bought impulsively.

When I purchased my first share in February 2016, my broker recommended that I invest in a company called Mahindra and Mahindra (M&M). We started a Systematic Investment Plan and every month on a fixed date, my broker would automatically buy a few shares of M&M. These shares accumulated in my Demat account and by August 2018, I had a good number of shares. From February 2016 to August 2018, the share prices rose from Rs 615 to 965. 

In August 2018, I made an impulsive decision to sell my shares and happily cashed my profit of Rs 350 per share. Today, 4 years later in August 2022, M&M shares are trading at about Rs 1300. Had I not sold my shares back then, I would have made an additional gain of Rs 335 from August 2018 to August 2022, and my total gain would have been Rs 685 per share. 

So now my doubt is this: Did I really make a profit of Rs 350 per share? Or did I lose Rs 335 just because I did not know when to sell my share?  

Many stock investors spend a lot of time wondering if they should hold a share or sell it off. This might happen when markets become volatile or even when markets show a rising trend. So when should you sell a stock?

1. If you are not sure of the company or don't feel comfortable buying the whole company, don't buy a part of it. When you buy a car or a laptop, you don't buy it wondering if it will give you what you want or not. You buy it only after sufficient research, talking to other users, and after you are satisfied that your needs will be fulfilled. 

Similarly, when it comes to buying and holding stocks, buy shares only if you know that they will be good for you for the time period you are looking to invest. How will you know? Consider this question: If you could buy the entire company by selling all your assets, would you buy it? If you don't, then don't buy it at all, even in parts. And if you do hold stocks of companies that you aren't sure about, consider selling them. 

2. Luck by chance: When you buy companies considering that they may be lucky and hold them without any research, you might be risking losing money since you are considering luck to favor you. If you hold stocks of companies that are not discussed very often or have no value over time, keep away from such stocks and sell them so that you can invest them somewhere else. 

3. Buy quality over quantity: Just like you need to have a staple set of high-quality clothes in your closet to be presentable at any given point in time, first focus on buying and holding good quality stocks in your portfolio. Buying a large number of unnecessary stocks impulsively will waste your time, money and peace of mind. 

4. Look at your time-based goals: The selling strategy for each investor depends on his time-based goals. If an investor is consistently investing in stocks for the long term and has 30 years to invest money, they don't need to sell their stocks if stock prices fall by 20 to 30% today. This is because they have a long time ahead of them and shares will usually rebound and climb back by that time. But if someone who is close to retirement has invested most of his money in stocks, then a fall in the market will trigger him to sell his shares immediately since his need for cash is much more today. 

5. Look at future plans and actions: You might have invested in a company based on great past records and wonderful dividend returns. But look at the company's vision and future prospects, their current actions, their market share and how things are shaping up for them. If they have no strong plans, their growth seems limited or the company's market share is falling and the company has no justification for it, you might want to consider selling such stocks. 

6. Management changes: The management of a company decides its vision and takes actions to take the company forward. When shareholders buy shares of a company, they trust the management to manage their money well. So a sudden change in the board of directors, or an accusation of mismanagement of finances can breach the trust of shareholders and cause volatility in share prices. In such cases, it is better to not hold such shares. 

7. Product problems: If you are a US-based investor, you may have invested in companies like Johnson & Johnson because of the popularity of its talcum-based powder products across the globe. But now that thousands of customers are filing cases against the company due to contaminated products and knowingly hiding health effects, investors are dumping shares in the market. Shares have fallen by 4% in the last 1 year.