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When Should You Sell a Stock?

There can be a number of reasons for an investor to sell a stock. To determine when you should sell a stock, investors should review what the original goal was of buying each individual stock.

Here are some illustrative examples.

Is it a speculative play?

I bought Katanga Mining Ltd. (TSX:KAT) about three weeks ago as a speculative play. The stock popped 26% on Tuesday on good news.

My conclusion in the article was that “I wouldn’t penalize anyone who chooses to take profit, as no one knows what’s going to happen in the future, especially to a speculative stock.”

When I saw that the stock didn’t seem to have the energy to move higher on Wednesday, I took profit — gross returns of 51% in three weeks. Luck would have it that the stock headed lower on Thursday, but honestly, I have no crystal ball to see where the stock will trade tomorrow, next week, or next month.

All I know is to sell on good news and potentially buy on bad news for a speculative play.

Is it a long-term investment?

If you hold a stable, dividend-growth stock, such as Toronto-Dominion Bank (TSX:TD)(NYSE:TD), which offers a decent dividend yield, perhaps there’s no reason to ever sell the stock.

TD is a blue-chip company that continues to post higher profits over time, which leads to an increasing dividend. The stock has roughly doubled its dividend in seven years. Given the stable growth profile of the quality bank, TD should continue to grow its dividend at a pace that roughly matches its earnings growth.

At about $76 per share, TD trades at a reasonable valuation. Based on earnings-per-share growth estimations of 9-12% per year, TD can deliver long-term returns of about 12-15%.

Does it need rebalancing?

Sometimes, your position in a stock can grow so big that you feel uncomfortable. For example, since its initial public offering in June 2014, Kinaxis Inc. (TSX:KXS) stock has appreciated about 560%! Early investors of the stock might have a big position in it.

Some investors don’t allow a stock to grow more than 5% of their portfolios. When it does, they will sell some shares to reduce the size of the position. Other investors choose not to rebalance because they don’t want to clip the wings of their winners. And, of course, there are fees will be incurred when you trade. So, it really comes down to how you want to manage your portfolio and positions.

Investor takeaway

Whether to sell a stock or not depends partly on your goal of buying the stock. What do you want to get out of the stock? In any case, it’s best to have an exit strategy (before you buy the stock) for the different scenarios that might occur. That way, you can be rational about your selling decisions.

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Fool contributor Kay Ng has no position in any of the stocks mentioned. Kinaxis is a recommendation of Stock Advisor Canada.

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