Investing in the stock market can be an incredibly rewarding, and dangerous, game. Many investors are successful in turning a profit every year due, in part, to their choices when deciding whether to keep or sell stock. When you have invested in a stock and it drops, you may be considering whether or not to sell. Included here are a few tips to consider when your stocks fall.
Weakness in the Market
When your stocks fall, it is crucial to keep in mind whether the problem is the specific company, or the stock market overall. Weakness in the stock market is never a good reason to sell, as stocks are always prone to rises and falls. If you keep a well-diversified portfolio of stocks, you should be able to overcome any falls and benefit yourself beyond the rate of inflation.
When a stock falls, consider the industry in which that company operates. Most industries have a pattern of seasons wherein their stock is valued for more or less. Some industries are dependent on economic stability, meaning as the economy expands overall, your stock will increase and as it contracts, that industry will decrease. There are other industries that are counter-cyclical and move in a complete opposite direction of the economy as a whole.
Liability Issues Within an Industry
Two industries frequently targeted by liability issues are tobacco and asbestos. Because of the health problems caused by these two industries, they are often faced with mountains of litigation. When investing, it is wise to consider these liabilities and issues within a company before committing. If your stock drops as a result of litigation, first consider how valid the claims are against that firm before you sell.
As unfortunate as it may be, many firms suffer from a social or economic disaster at some point. Try to discern how debilitating the disaster is before you sell your stock. Consider whether the fundamentals of the company will be altered at all following the suit and whether they are indications of further problems. Some companies may suffer a one-time disaster, while others could be indicative of future issues in the long-term.
Alterations to Company Management
Some investors choose to sell if the CEO of their company retires or leaves their position. Fortunately, this change in leaders could simply be the natural turnover of company leaders and is not necessarily an indication of bad things to come in that business. However, if you see all of the top management positions of a company removing themselves from leadership or changing companies, it is a red flag that you’re on a sinking ship and should sell and get out.