Question: How do I know when to sell my stock? Buying seems to be easier.

Elizabeth Bayard

Answer:

Dear Ms. Bayard,

You're absolutely right. Determining what stocks to buy, and when, does seem to be a simpler thought process. In fact, financial whiz kids and Wall Street gurus love to talk about stocks to buy. That's the easy part. But when to sell is a more difficult business.

Although there's no foolproof system for making certain you always buy low and sell high, you can make an educated decision.

The first basic rule to follow in mastering the art of selling is to know whether you bought the stock for income or growth. Many people overlook this important distinction.

Growth. If you purchased the stock for growth and price appreciation, it makes sense to hold it as long as the company's earnings keep rising at a steady pace. If profits slow down, find out why. Then sell unless you discover a truly viable reason why profits will increase within a year.

Income. Keep the stock as long as the company is financially solid and its earnings per share exceed the dividend by at least 10% and they (i.e., earnings) are rising more than 5% a year. Feel free to modify the percentages as needed to fit your financial means.

If earnings stagnate for several quarters, or if an independent rating agency, such as Standard & Poor's or Moody's, downgrades the firm's creditworthiness, you should consider selling.

Other when-to-sell guidelines

• You should consider selling if you think the company is in serious trouble and its earnings prospects are poor and not likely to recover quickly.
  
  
• If your stock suddenly drops in price by 20% or more within a short time frame (a month or less), you need to find out why and then rethink your position. Again, you should at all times consider your financial ability to sustain losses and modify this percentage to fit your financial means.
  
  
• You can sell into strength. Each time the market makes a major move on the up side, sell a portion of your holdings. For example, if you own 500 shares of the XYZ Corporation and you have big gains, sell 100 share each time the stock appreciates 10%. You reduce your risk and at the time, you're selling your shares at higher prices.
  
  A variation on that theme is to sell one-third or half of your position when you've doubled your money.

Bottom line: Keep the old Wall Street adage in mind as you review your portfolio: "No one ever went broke taking a profit."

Good luck!