Buying stocks can be a fairly straightforward undertaking, whether done online or through a financial advisor. But when it’s time to sell shares, some beginning investors struggle with how to turn their stocks back into cash. After all, money invested in stocks is not, immediately, cash.
Liquid assets, like stocks, can still be converted into cash in a short amount of time. Because they’re typically faster to liquidate than investment items like real estate or jewelry, stocks are sometimes referred to as “cash equivalents.” Until an investor sells a stock, however, the money stays tied up in the market.
Investors may want to sell stocks for a wide variety of reasons. They might wish to reinvest the cash into another asset with an eye towards long-term gains. Or, alternately, they could choose to withdraw funds from the stock market to cover short-term, daily expenses with cash earned from the sale.
So, how might investors go about cashing out stocks? And what factors might individuals curious about how to cash out stocks bear in mind? Here’s an overview of the how and when of selling stocks.
Related: 6 real questions about investing— answered
Motivations for Selling Stocks
Some traders watch their portfolio closely, selling stocks regularly to cash out profits or avoid major losses.
However, one common reason investors decide to sell stocks is that they need the cash from the investments to pay for life expenses. While different investors might sell for different reasons, it can be helpful to understand the motivation that drives the desire to sell.
Investors who are debating selling a stock may want to ask themselves whether they’re interested in cashing out based on an emotional reaction (fear of recent market ups and downs, for instance) or out of an urgent financial need.
For instance, if the market sees a sudden decline or sharp dip, it can be tempting to want to cash out to avoid potential losses. But selling while the market is declining does not always lead to higher returns in the long run.
Simply put, knowing when to sell a stock can be challenging. Rather than trying to time the market, individuals may want to invest for the long term. Since the market has historically risen over time despite short term ups and downs, it’s probable that what’s happening right now in the market will not reflect the direction of the markets down the road.
Before selling any stocks, investors might opt to evaluate their personal financial goals, both short-term and long-term. Then, they could come up with a plan to pursue those objectives.
So, why might investors want to cash out stocks? Some common reasons could include the following.
1. Accessing Cash for Life Expenses
If an investor knows they’ll need cash for a major life expense, such as buying a car or home, they may choose to cash out some stocks. Selling shares might ensure there’s enough cash around to cover big expenses.
In addition, cash is not subject to the ups and downs of the stock market. Still, the value of cash is impacted, over time, by inflation (more on this later).
Some investors might also opt to move money out of stocks into potentially more secure investments, such as bonds or a money market account, until they’re ready to pay for that large expense. This way, their money is still earning interest while also being at a lower risk of losing value.
2. Cashing Out Profits
If it appears as though a recession is coming or investors have seen significant gains in their portfolio, they might choose to cash out on their existing profits.
This could be a good strategy if investors plan to make a large purchase or reinvest into other assets. But it’s worth repeating that attempting to time the market is risky. What seems to be a trend in the market one day may or may not indicate where the markets will meander in the future.
3. Preventing Significant Losses
The goal of investing in stocks is to earn profits, not take losses. Still, there are some instances in which it could make sense to sell at a loss.
An investor may seek to prevent the likelihood of deeper losses in the future, for example.
In other instances, a company might reduce or altogether eliminate the dividends paid to shareholders. Earning dividends may be a prime reason an investor bought a stock
Another scenario that might drive an investor to want to sell stocks is an industry-wide hardship, where numerous companies in one sector of the economy experience financial calamity at the same time. Industry-wide hardships may negatively impact the value of specific stock holdings.
4. Day Trading
Day trading is one way of selling stocks, but it can carry significant risks. According to the U.S. Securities and Exchange Commission (SEC), day trades are the purchasing and selling (or vice versa) of the same stock on the same day. Here, traders are attempting to gain profit through short-term trades, typically through the use of technical or market analyses. This can require an in-depth knowledge of the intricacies of trading.
If it were possible to clearly predict future stock movements, everyone might want in on the stock market. However, stocks are volatile. Rather than guessing based on company news and technical analyses, traders who wish to make shorter term trades might choose to set a price goal. For instance, if they buy shares at $10 each, they could set a goal to sell them when they reach $18 per share.
5. Offloading Low Performing Stocks
Even if an investor conducts thorough research on a company before buying a stock, they may later realize that the stock wasn’t a boon for their portfolio. If a purchased stock continues to decline in value over time, investors may opt to offload the low performing stock.
Owning a stock that continually underperforms compared to the rest of the market could bereason enough to sell, for some. A shareholder may also conclude they no longer agree with the business choices of a company they’ve invested in. The shareholder may also believe that the company leadership isn’t making decisions they can stand behind.
Understanding Types of Sell Orders
Once an investor has decided to cash out a stock, there are several options for how to sell. Each comes with different amounts of control over the sale.
Whether investors buy stocks online, work with a financial advisor, or go through a brokerage account, it’s possible to sell shares and stocks. Here’s an overview of the most common types of sell orders.
1. Market Orders
When placing a market order, an investor agrees to sell their shares at whatever the current market price per share is. The sell order will be placed immediately, (or when the market reopens if the order is placed after hours).
One upside of market orders is that the trade is guaranteed to go through and is executed quickly. A downside is that the investor has no control over the selling price.
2. Limit Orders
With a limit order, however, an investor can set the minimum price they are willing to sell their shares for. The sell order only gets executed in this case if and when the stock reaches that price or higher.
The upside of limit orders is that investors can control the selling price (and potentially get a higher price than the current market rate).
One possible downside is that their order won’t go through instantly. Moreoever, it potentially might never go through if the stock never reaches the selected price.
3. Stop Orders or Stop-Loss Orders
With a stop order, the shares will only sell if their value hits the stop price, which is lower than the current market rate. The reason investors set stop orders is to prevent incurring significant losses, if a stock plummets in value.
The upside of stop orders is that they prevent losses. One downside, though, is that the sale occurs once the stock has gone down in value. So, it’s possible the shares could be lower in value than their initial purchase price when the stop price is hit.
4. Trailing Sell Stop Orders
Investors may also choose to set a trailing sell stop order. This is like a stop order, but the sell price automatically increases as the value of the stock goes up. In this way, traders might benefit from gains while still protecting themselves from losses.
Factors to Assess When Cashing Out Stocks
When investors are thinking about selling stocks, they not only need to know why and how they are selling, but which stocks in their portfolio they’ll choose to sell.
Every stock is different, so investors might want to research their holdings when deciding which stocks to cash out. For example, once a stock is sold, investors must pay capital gains taxes on any profits earned from the sale. Not all stock holdings are taxed in the same way, which could impact an investor’s decision to sell or not to sell.
So, if an investor wants to minimize the capital gains taxes they’ll owe, they could sell just those stocks which have seen lower gains. If an investor takes a loss on a stock, they may be able to offset some of their capital gains taxes by subtracting that loss.
When cashing out stocks, some traders may want to sell stocks or shares that have seen the largest gains. But as noted above, investors need to be prepared to pay the capital gains taxes on these higher-performing shares.
If a stock is held for more than a year, the capital gains are considered long term. That means they garner a lower tax rate than short term gains, which get taxed as ordinary income.
Reinvesting Profits
Investors may choose to sell stocks in order to gain or spend cash. But individuals may want to reinvest earnings from sold stocks into other assets. There are pros and cons to reinvesting earnings.
Pros
- By reinvesting profits from the sale of a stock, that money could continue to grow with the market.
- Cash is subject to inflation, which makes cash savings lose value over time. By reinvesting rather than holding on to cash, investors are less likely to lose money due to inflation. Over a long-term period, cash tends to lose value, whereas the stock market tends to grow.
Cons
- Holding cash instead of stocks can help prevent losses in the event of a sudden stock market crash or deep recession.
Platforms for Buying and Selling Stocks
People just getting started with building a portfolio of stocks have several options for doing so. Options might include online platforms or traditional phone-in and in-person traders, including some of the following.
1. Brokerage Accounts
There are numerous online brokerage accounts, where investors can buy and sell stocks to build a portfolio. Opening a brokerage account will require an identity verification and connection with a bank account for deposits and withdrawals.
2. Digital Apps
A newer addition to investing is digital trading apps. These may be offered by an established brokerage firm or by a financial tech company. When using an app, buying and selling stocks is as quick and easy as clicking a few buttons.
Digital apps can be a convenient way to invest, offering users the ability to sell from anywhere. Many trading apps don’t charge a commission on trades, unlike many traditional brokerage firms.
Image Credit: Deposit Photos.
3. Financial Advisors
Investors can also make stock trades over the phone or in person by working with a financial advisor. Prior to the arrival of web-driven trading, most stocks were bought and sold through brokers or financial advisors. Sell orders placed through these individuals generally get executed within 24 hours, so it can be a slower method to cashing out stocks.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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