When to Dump Your Stock (2024)

Unless you are a day trader, selling stock is often the last thing on your mind. More often than not, long-term investors tend to hold onto their stock, biding their time and hoping to see it grow in value. The yearly increments and the stream of dividends are their key motivators as they look forward to a big payday when (and if) they sell the stock. However, this holding on comes with one big downside- the stock could come crashing down at any time, leading to a loss so big that you might not recover for a while. You have probably heard of black swan events that brought investors to their knees. So, how can you avoid such a scenario? Let’s cover some instances where dumping your stock is in your best interests:

Scandal

Companies are not immune from scandals, and now and then, they will do something that will have the world talking. It can be so bad that market dynamics start working against the company, especially when the management refuses to be accountable for its actions. Should you sell your stock when a scandal rocks a company?

Yes and no. Yes, if the management does not change leadership or does not appear to be taking accountability. If you realize that the company has been willingly doing fraudulent or unethical things and getting away with it even when these things are highlighted in public, you will want to cut your losses and walk away. No, if the company accepts its faults and implements measures to prevent the same from happening again.

When a scandal rocks a business, your first instinct may be to sell your stock. But wait, not just yet. Allow the management to respond and watch the market over the next few weeks. The chances are high that the leadership will restore investor confidence. If not, jump ship!

Debt

Companies are always seeking to expand, and with this need comes some extreme measures. Most companies acquire smaller ones using debt, and in doing so, they rack up quite a huge debt. This acquisition would not be a problem if the companies had high revenue growth. However, since the crash of 2008, revenue growth has been slow, and profits have been trickling in. Thus, with major acquisitions, the company falls into more distress.

The common misconception is that buying other companies makes it easier for the parent companies to stay afloat. But this is not the case. If anything, these acquisitions can fool investors into thinking the company is doing well while, in reality, the management is poor and the debt is out of control.

As an investor, you must note the cash flows and figure out if the company is paying back debt or is amassing more. At the same time, keep watch of the sales growth. If the sales are not growing as expected and the company is focused on acquiring more companies, it may be time to sell your stock.

Management

The management is the driver of any company and impacts how well a company does. The management is not only in charge of steering the company but investor expectations too. As the management works on growing earnings, it should also explain to investors why their profits are not as high as expected. So, how can you tell that management is slacking on the job?

Missed earnings are common, but they should not be too common. Most companies meet their estimates each quarter, signaling that this is something that can be done. However, if a company often misses the expectations, investors will not have much confidence in their shares and the management.

Another determinant is performance ratings against its competitors. You cannot expect a company to always come out on top of financials and operating margins. But if the company can barely hold its own when it comes to the competition, you may have a big problem in your hands.

Watch out for such management efficacy standards and make a decision accordingly.

While at it, consider selling your stock if you want to adjust your portfolio or finally get your share price target. You can always find more stocks on a stock investing official website as you seek more investing options.

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