Summary: Selling an asset involves liquidating the asset in exchange for cash that was in a long position previously. A sell bet is placed when a trader believes that the price of a security is going to fall.
Just like buying stocks, selling stocks is a constituent part of a well-managed portfolio. Investors who buy stocks will eventually need to sell them at some point in the future unless they’re income-driven or want to hold the investment until their retirement. Still, financial markets are becoming more and more fast-paced and, in some cases, assets are sold seconds after they’re bought.
Whatever your trading style is, you’ll likely want to sell your financial instruments once your investment becomes profitable. In this article, we’ll show you how to do exactly that – how to sell shares, when to sell them and what are the pros and cons of selling. So, let’s get started.
How to Sell Shares with Sell Orders
If you want to sell your financial instruments, there are many order types to choose from. The most popular of them are:
1) Market orders – A sell market order is used if you want to sell your investments at the current market prices. This is the most commonly used order type to sell on the market. When using market orders, you need to be aware of a potential slippage and widening spreads between the buying and selling prices. To avoid unnecessary costs, try to place your sell market order during the most liquid hours of the market you’re trading.
2) Pending orders – Pending orders will automatically sell your open long position once the price hits a pre-specified level. A take-profit order, for example, is a pending order which closes a long position after the price hits a certain threshold in your favour. Similarly, a stop-loss order closes a long position by selling at the pre-specified stop-loss level in order to avoid larger losses.
Besides take-profit and stop-loss orders, you can also use stop orders which trigger a sale at a pre-specified price or limit orders which name a minimally acceptable sales price.
When to Sell Your Stocks?
Probably the most important question of all is how to determine the right time for selling shares certificates, stocks, currencies or any other financial instrument. There is no universal answer to this question and the perfect time varies from trader to trader and their personal trading goals.
If you’re an income-driven investor, you may want to hold your investment for a longer period of time. The S&P 500 stock index has been rising for the most part of the last 100 years, and the following table shows its performance from 1998 to 2017. As you can see, the S&P 500 had a positive return in 15 out of the 20 last years.
However, most traders buy stocks with the incentive to hold them for a very short period of time, sometimes even selling them during the same day in case of day-traders. With this trading style, following technical price levels to determine the best time to sell a long position usually returns the best results. Look for important horizontal support and resistance levels, trendline levels or projected profit targets of chart patterns to identify the best price to sell your stocks.
There are many advantages of selling shares based on shorter-term technical levels. Unless you want your trading capital to be locked for a longer period of time and miss potential trading opportunities on other fronts, following short-term technical levels also allows you to avoid the negative impact that price corrections might have on your investment performance. The disadvantage of this approach is that you’ll likely have to actively manage your trades, whereas longer-term investors are able to utilise a “set-and-forget” approach.
Read: What is Arbitrage?
Other Trading Basics
Backwardation occurs when a bid price exceeds the ask price.
This usually occurs when stock is suspended or under a share repurchase scheme.
It can also mean that a futures contract will trade at a higher price when it is coming close to expiring.
The opposite of backwardation is known as contango.