Whether you’re up on your position or sitting on a loss, properly timing when to unload your penny stock shares is even more important than knowing which penny stocks to buy in the first place.
You may be selling shares to take profits from a winning penny stock or to unload a losing position at a loss. While most people don’t see the difference in terms of approach, they are two very distinct situations, with different considerations.
When to take a profit
Although selling stocks to take a profit is much more enjoyable than taking a loss, you still need to know when (and why) to take profits. Among reasons for taking profits, consider these:
To lock in gains: Any time that shares of your penny stock are trading much higher than your purchase price, you may want to sell them to lock in the gains. Whether you sell a portion by scaling out or unload all the shares at once, you convert that theoretical gain into actual dollars. By selling you also remove the risk of the penny stock dropping in value.
To beat the profit-taking stampede: When a penny stock goes up dramatically in price over a short time period, a number of investors usually sell their shares in order to take these newfound profits. This selling can drive shares right back down, and you may do well to get ahead of that price fall.
When the outlook for shares is bleak: If your analysis shows trouble on the horizon, you’ll do better to take profits now rather than to hang around until the trouble actually arrives.
When trading volume declines: When shares trade much higher but then see a marked drop-off in trading volume, the penny stock may be about to take a fall. Most upside gains are fueled by, and can only exist with, a high degree of investor activity. When that buzz goes away, the share price often fails to maintain its lofty new price.
When to sell at a loss
Until you actually sell your losing shares, those losses are only on paper (or displayed digitally in your online brokerage account). The moment you actually unload the stock, that theoretical loss becomes real.
Selling at a loss is one of the hardest things for investors to do in the market. However, you’ll be more profitable overall by strategically selling your losing shares. Due to the risky nature of penny stocks, having a good handle on this aspect of investing is one of the most important tools in your arsenal.
While selling at a loss is a tough decision to make, it can very often be the correct one. Even the best penny stock traders have good reasons to sell shares at a loss, including:
When the price hits a stop-loss: Whether your trigger price is set in your head or connected to an automated sale through your broker, as soon as your stock hits the predetermined price, you need to sell in order to minimize your losses.
When trading volume increases while share prices fall: If the daily trading volume increases significantly while the share price drops, that represents a stampede out of the penny stock, which is a very negative sign. Trading volume that decreases to a fraction of the three- or six-month average represents a drop-off in total investor interest and activity and is not a good indicator.
When technical analysis (TA) indicates a downturn: TA patterns can demonstrate when a penny stock has a higher likelihood of going lower; when your TA forecasts a fall in price, selling shares may help you escape further downside.
When an event has minimal impact: If you were expecting a certain event to bolster shares and that boost didn’t occur, you need to consider if there is anything else on the horizon that may help your losing position recover. If not, selling and moving on may be the best move.
When you anticipate further downside: Regardless of the cause for downside, if you expect more of the same, selling before the shares drop farther is the correct decision. Just make sure to understand the implications of buying the rumor.
