Everything you need to know about selling your shares

When to sell stock and how to go about it
Everything you need to know about selling your shares
Updated
September 1, 2021

Table of contents

In a lot of ways, buying is the easy part. 

Once you’ve identified a good entry point and pulled the trigger on a stock, you’re in. You might even be investing in the same assets regularly and robotically to take a bit of thought out of the process. 

But a lot can happen next that can make selling that same stock a tricky prospect. It doesn’t have to be though. While how to invest in stocks is always a hot topic, here are a few things to think about when you’re mulling over selling your shares.

Why you might consider selling your stocks

Your investment journey should start with identifying your goals, how long you have until  you need the money and your tolerance for investment risk.

If that’s the basis for what you invest in, it follows that a big reason you’d sell your assets would be if that timeframe runs down and those financial goals come into view. It’s not the only prompt for investors to consider though.

If something drastic has changed in the company you bought into, you might have to rethink whether it really is the same opportunity you identified in the first place. 

There might have been a change of management, corporate strategy or maybe company bosses have made a key decision you don’t agree with. Maybe a corporate action is on the table, like a merger, or it could be that your thesis has simply played out.

If you are a value investor, chances are you’ll have taken a position in an unloved or ignored firm down on its luck. Investors in this position often look to sell when a corporate turnaround has been enacted and is complete, or when rising valuations start to show the market has cottoned on to the company’s potential. 

That might prompt contrarians to sell up and recycle that money into another undervalued so-called ‘special situation’.

It could even be that investors choose to sell slightly before then if they have spied what they think is a better growth prospect elsewhere. The opportunity cost of missing out on capital appreciation in another stock might be too great to ignore.

A less positive reason to think about selling is if your stock has dropped and you’re wondering if it’s time to cut your losses. This is maybe the most psychologically difficult position to be in because we’re likely to let our ego get involved. 

Before it gets to that stage, it might be that you need to have a think about how much your personal pride could affect that decision.

As renowned investor George Soros said, "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."

When to sell your stocks

If one of these eventualities means you’re going to sell, think about how you’ll go about it. Is it a ‘cut and run’ situation or would you be happier selling in stages?

Most likely that that will be informed by what’s behind your decision to sell. That can feel obvious if there is a concrete event influencing you, like a strategy update or trading results. 

But what a lot of people find difficult is selling a stock when there is feasibly more room for it to grow. Having taken the risk in the first place, investors don’t want to miss out on the full reward available. The tricky part here is that there’s no telling what a stock will do in the near term.

One way to manage the situation is to come out in stages. Withdrawing at intervals means you are steadily taking risk off the table and leaving some of your money exposed to further possible gains. If the price falls since your initial sale, your overall selling price will be helped by that first sell price. If the price rises, your gains will be enhanced.

 

Costs of selling shares

High trading costs can eat into profits at the best of times. If your broker charges you to place a trade and charges you on the way out too, that means there’s already an initial hurdle your investments have to overcome before they are into profit. 

Before you start investing, make sure to consider any fees related to selling, transferring your account to another broker or even closing your account. 


Broker commission and fees

Whether they come as a flat fee or a percentage of the sum you’re selling, make sure you know exactly what you’ll be paying if you place a sale. 

This becomes especially important if you are coming out in stages. Depending on the value of your holding, the charges levied on actually getting you out of the stock might make quite a dent in the overall value you receive.

That’s why it’s doubly important to be clued up on exactly what charges will be added to your buying and selling before you begin.


Investment tax when selling your shares

What tax do you pay?

Account and transaction fees aren’t the only considerations to make when it comes to calculating what your investments will be worth after you sell them.

Tax is an important element to understand but it really doesn’t have to get too complicated. In the UK, the most common tax investors will have to consider is capital gains tax (CGT). 

We have a full rundown on paying tax on investment income and capital gains and there are all sorts of fringe schemes some investors use but, for the most part, CGT will be the first thing to think about.

In the 2021/22 tax year investors are given a CGT allowance of £12,300. This means your investments can grow by this amount before you have to start paying tax on those gains. Of course, your gains are allowed to grow to whatever level they can, it just means that any gains above that threshold may be liable for tax. 

 

When you don't pay tax

The advantage of investing in a tax-efficient account like a SIPP or ISA, as opposed to a general investment account is just that - you are investing with an eye to managing how much tax you ultimately have to pay.

None of us can predict how well our investments will perform. If they turn out to provide big gains, the last thing you need is to be working out your tax bill because you chose a less-efficient account.

In a stocks and shares ISA (you might hear it called an investment ISA too), you can invest up to £20,000 a year and won't have to pay CGT on any gains your investments make inside the account.

You can get access to these investments at any time so ISAs can be useful for housing any investments you have which are geared towards pre-retirement goals.

SIPPs (self-invested personal pensions) are tax-efficient accounts designed to be used for any investments focused on retirement. 

You may already have a workplace pension scheme or even a number of pensions from previous jobs. One of the advantages here is that you can transfer pensions into a SIPP. This can make it easier to manage them all and give a better idea of what account fees you are paying.

For the 2020/21 tax year, the annual allowance across all of your pensions is £40,000. 

You can contribute more than £40,000 if you want, but any amount beyond that figure will not receive tax relief, unless you can use carry forward of any unused allowances but only from the three previous tax years and only if you were a member of a pension scheme during those three years.

What to consider before selling

It might be obvious to you in the moment that selling a stock is the right thing to do. But take a second to ask yourself if you’re basing that decision on bottom-up stock analysis or if you’re allowing emotion, fear, greed, restlessness or even boredom to creep in.

Unfortunately today’s high tempo investment environment is not conducive to long holding periods. 24 hour news, social media fanaticism and trends towards instant gratification mean we are less likely to hold investments for the long term. Those influences can drive short-term decisions which could stunt the growth of our accounts over time, like hopping between queues at the supermarket. Invariably those fleeting decisions set you back even further when simply waiting could have helped.

Try to take a step back and interrogate your seemingly sound reasons for selling. If impatience is a factor, maybe that’s what needs to be addressed, not the stock. And even if a stock is down, has the overall investment case changed or are you getting scared by a bit of red in the portfolio?

Do your best to keep the emotions at bay and make decisions based on as logical a foundation as you can muster. That means not getting overly attached to a stock too. When it comes time to sell, you’re not breaking up with the stock, you’re simply putting down a tool. 

As Peter Lynch said, the stock doesn’t know you own it.

Sell Order types

Market order

What is it?

Most straightforward orders we place while the stock market is open are market orders.

A market order will execute your buy or sell instruction immediately at the market’s current best available price.


When to use it

They’re best used when investors’ primary aim is immediacy, as market orders prioritise speed over guaranteeing a specific price.

If you place a market order after the market has closed, it could be that it is then executed the next day. A lot can happen overnight to shift investor sentiment, like earnings results, news reports or geopolitical events so the price range you were expecting could change.

That’s why most investors will use market orders only during market hours.


Limit order

What is it?

Rather than offering an instant transaction, a limit order lets investors specify a buy or sell price for a stock, with the transaction only taking place if those prices are hit.

An example might be that you want to buy a stock but consider its current price too high. Placing a limit order with a lower price means your buy will only go through if the stock drops to that lower price.

When to use it

If your valuation research has given you a certain price range within which you want to buy or sell a stock, limit orders can help as a kind of ‘trade and forget’ strategy instead of having to stay on top of prices constantly.

There are some things to consider though. Even if the stock in question hit the limit you have specified, your order may be at the back of the queue and might not eventually be filled. As limit orders generally work on a first-come, first served basis, some other orders might get there at that given price before you.

Just like market orders prioritise execution, limit orders specify price.


Sell stop order/stop-loss sell order

What is it?

Placing a stop order gives an instruction to buy or sell a stock at the market price once a certain price level has been reached. If the stock hits the stop price, the market order is filled and the trade is completed. If the stock doesn’t reach the specified price, the order isn’t executed.

When to use it

Some investors like to use stop orders to protect gains or to buy into a stock’s positive momentum. If one of your stocks has risen, you could place a stop order at a lower price than it is currently at so that, if it falls, your profit so far is preserved.

If you have identified upward momentum in a stock, it may be useful to place a stop order slightly above the current price so that, if momentum carries on, your order will be filled en route to further positive performance.

Is a limit order different to a stop order?

On the surface, limit orders and stop orders can appear very similar. The big difference between the two is a limit order will only ever be filled at the price limit specified, or better. A stop order will be filled at the market price, once it has been triggered. 

This means there is the potential for the eventual price to be markedly different than the stop price, as that trigger only begins the search to fill the order. If a stock is particularly illiquid, the order might have to accept prices different to the original stop order price.

 

Why is my sell rejected?

Most often, rejected sell orders are a result of a lack of buyers out there.

Investors used to buying and selling big blue chips on the FTSE 100 or S&P 500 might find it odd that there sometimes aren’t enough buyers and sellers to create an efficient market. But if you’re used to trading in small cap stocks, that feeling will be all too real.

What we’re talking about here is liquidity, or how easy it is to trade in a certain stock. There is so much interest in big stock market names that there is rarely a time when market makers can’t match buyers with sellers. But the more obscure the company or the lower the trading volumes are, the more difficult that task becomes.

Sometimes it can help to change the size of the order you are putting through, or it might help to do it in batches as smaller orders can generally be easier to match with a counterparty.

Five stock selling strategies

As we’ve mentioned there certainly are reasons to sell a stock but none of them are based on emotion. Here are five questions to ask yourself when you’re thinking of selling, so that fear or greed aren’t the biggest influences on your eventual decisions.

1. What is the valuation telling you?

Buying into stocks with low price-to-earnings (PE) ratios can be fruitful if solid earnings start to influence a higher share price. That’s the bread and butter of contrarians and value investors the world over. 

For these investors, simply getting to a reasonable valuation from a low one is often a reason to sell and look for another value stock. 

For quality growth investors, that valuation sensitivity is less important but can still be a factor in selling if PE ratios start to look detached from the underlying fundamentals of the business.

2. Is there a better opportunity elsewhere?

It might be that there is nothing wrong with what you hold at the minute but it just so happens that you see a brighter future for an entirely different stock. 

Selling your current one to buy into another company should not be a decision you take lightly and should be based on sound reasoning and assessment of both company’s financial positions. 

Don’t forget why you bought into the first stock - it might be that it’s time to move on or it might be that a current lull has made you forget what you saw in it at the beginning.

3. Is the business deteriorating?

There can be 101 reasons why a share price is dipping. But just looking at prices doesn’t tell you very much about the underlying business, all it does is tell you about what other investors are doing. 

That’s why it’s so important to ignore the noise and look at the actual business itself. Is management allocating capital effectively? Is the company producing solid profits and pumping that back into operations to provide even higher levels of return? 

Or is management squandering cash on vanity projects and big bonuses? Looking at the accounts will tell you a lot more about whether a share price dive is because of short-term market nerves or deep-seated financial concerns. 

4. Has the stock reached your target price?

Phrases like “I’ll sell when it gets to…” or “I won’t buy until it falls to…” are most often followed by lovely round numbers plucked out of thin air. There is rarely any reason behind these pounds and pence figures except that we use them to signal good value to us, the buyers and sellers. 

But remember, the stock doesn’t owe you anything. Your targets aren’t important to it because it doesn’t know what they are and it certainly has no intention of acting in the specific way you’d like it to.

That means targets based purely on what you’d like the price to be are worthless. On the other hand, using valuations to determine what a reasonable price to sell at, given the firm’s earnings, is crucial.

Try to stay away from target prices and put your energy into buying into valuations. As Buffett said, “Price is what you pay, value is what you get.”

5. Do you need the money?

Don’t forget that investing is a tool to help us achieve our financial goals. So it’s normal to keep those goals in mind and eventually sell when we want to use that money.

What that might also mean is that, the closer you get to your goals, you climb down the risk ladder to minimise the chance of it all going pear shaped just as you need the money.

Gradually selling higher risk assets like equities and rebalancing your portfolio with lower risk assets like bonds can help achieve this as you wind down risk the closer you get to your goals.

When not to sell a stock

Short-termism is the scourge of all long-term investing. If you are being driven to sell a stock through excitement, impatience or boredom remind yourself why you bought it in the first place.

If the original investment case is still intact it might be that staying put is the better option. 

High share prices tend to be a popular reason investors sell too, as they think shares can’t go any higher. But thinking that way would have stopped a lot of people investing in the likes of Microsoft, Google and Apple over the years. 

Try not to base your decisions purely on share price charts. Focus instead on a firm’s ability to consistently generate above average earnings and produce high levels of profits over time.

It would be rare for the market to turn against companies like this.


Share price is dropping - should I hold or sell?

Before a share in your portfolio drops, perform a pre-mortem. Pretend you are in the future and it has fallen by 50%. Given what you know about the firm now, what are the likely causes for that fall? Could the company cope with a big hit to business or would a dearth in profits wipe it out?

Thinking like this will help you decide what to do in any share price drop that follows. It may be that it’s a short-term issue and that dip actually provides a chance to buy more shares. Or it may be that it’s a signal to say goodbye completely.

Look at what’s happening to the business, not just the share price on the surface.

FAQs:

At what times can you sell a stock?

For market orders, the UK stock market is open from 8am to 4.30pm, Monday to Friday. Stock markets in the US, including the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq), are open from 9.30am to 4 pm Eastern time on weekdays, or 2.30pm to 9pm UK time.

Is it cheaper to keep my shares electronically?

It’s becoming the norm to hold your shares electronically but ask your broker if there are any extra charges if you have to request a physical share certificate. You may also have to pay extra fees for paper statements as opposed to using a web-based platform or app.

How long does it take to sell shares?

Once your sell order goes through and is completed, there may still be a settlement period before the resultant money lands in your account. Usually this takes two to three days. Be aware that withdrawing this money completely, say to your bank account, can take another few days.

Freetrade is on a mission to get everyone investing. Our stock trading app makes it easy to buy and sell a wide range of investments, including stocks, ETFs, investment trusts, REITs, SPACs and even newly launched IPOs. Take a look at the most traded shares on the platform to see what retail investors are buying and selling.


Important information on SIPPs

SIPPs are a pension product designed for people who want to make their own investment decisions. You can normally only access the money from age 55 (set to rise to 57 from 6 April 2028).

This article is based on current rules, which can change, and tax relief depends on your personal circumstances. When you invest, your capital is at risk.

The value of your portfolio can go down as well as up and you may get back less than you invest.

Before transferring a pension you should ensure you will not lose valuable guarantees or incur excessive transfer penalties. Pensions are usually transferred as cash so you will be out of the market for a period.

Freetrade does not currently offer drawdown products for our SIPP.

Important information

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.

When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.

Eligibility to invest into an ISA and the value of tax savings depends on personal circumstances and all tax rules may change.

Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).

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