What’s the Perfect Time to Sell Your Shares?
Knowing when to buy a share is important, but picking the right time to sell your shares is also a crucial part of your investment process. During the time your trade is open, all profits and losses that you generate are unrealized until the time you sell your position and lock in your gains. That’s why we’ll explain how to find the perfect time to sell your shares in order to add the maximum amount of unrealized profits to your bottom line.
Sell overbought shares
A simple approach that professional investors take when deciding when to sell their shares, is to look for times when the shares become overbought. To do so, you need to know the difference between the market value and the intrinsic value of the share.
The market value of a share is the price at which the company’s share trades on the market. It’s the price that both buyers and sellers consider appropriate at the moment, given the current fundamentals and news about the company. But as investors are people with emotions, the market value of a share can significantly differ from its intrinsic value.
The intrinsic value of a share reflects the company’s real value, independent of the share’s market value. There are a number of ways to derive the share’s intrinsic value, such as projecting the company’s future earnings or comparing the share’s price with other competitors in the same industry.
If there is a significant difference between the market value and the intrinsic value of a share, common investing principles state that the market value shall return to its intrinsic value over time. In other words, if the share’s intrinsic value is below its market value, the share is considered overbought and it might be the perfect time to sell your shares.
Sell in times of unexpected news
We don’t know what the future brings when buying a share. That’s why we need to follow relevant news about a company and act immediately if the odds aren’t in our favor. Take Facebook and its affairs with Cambridge Analytica about private information for example. If you had a long position on Facebook’s shares, you would want to sell its shares as soon as those negative headlines hit the mainstream media.
Sell when the P/E ratio becomes unsustainable
Whatever rises has to eventually fall – and this is especially true in the financial markets. If a share’s price rises rapidly, there is a big chance that the price will reverse and make a move down. This is how the stock market operates – after a sharp rise in the price investors are locking in their profits which causes the share to make a correction. Unless you’re a trend-trader, your best bet is to close your position after the price makes a significant spike.
Another way to look at this is by the share’s Price/Earnings (P/E) ratio. The P/E ratio shows the current market price of the share divided by the company’s earnings per share, and is an important indicator of the share’s health. If the company’s P/E ratio is well above its yearly average or significantly higher compared to its competitors P/Es, sell your shares and lock in your profits as there might be a price correction ahead.