Saturday, July 19, 2014

How do you know when to get out of a stock?


Emotional attachments can be brutal, and hope can be your true enemy. If a company has experienced a serious setback and is losing market share, don’t let your emotions get in the way. Cut your losses, dump your shares, and find another place to invest your money.

·        If  the company eliminates the dividend, get out immediately.
           The company is in crisis mode.

·         If the company cuts the dividend, take a close look to get an idea of the company’s growth prospects in light of this cut.
              Selling this stock is a judgment call. A dividend cut shows the company needs to 
           conserve cash, typically to manage its debt. This move typically shows that
           management hasn’t been on top of finances and risk management. If the cut
           comes because of broader economic conditions, you have to determine
           whether you believe this management team can steer the company
           through dangerous waters. If the cut is because of the company’s internal
           problems, sell immediately.

·        If the company’s share price drops more than 10 percent but the company maintains the dividend, do a little more investigation.
This situation is another judgment call. First, look at the rest of the market. Is the price down because of a sharp decline in the sector or broad market? Is this company part of the sector causing all the trouble? For instance, if in early 2009 you held bank or real estate stocks that hadn’t cut their dividends, you may have expected them to soon follow their peers with a dividend cut. In that case, sell. If the yield is way out of whack with the rest of the sector (off by, say, 4 percentage points), that may be another warning sign to get out. On the other hand, if during a market downturn your stock  is part of a stronger, more defensive industry that continues to do business and should rally with the   economy, hold on for the ride and consider buying more.

·        If the share price drops and the company boosts the dividend payout, buy more shares.

In my quest for learning value investing I came acrros this interesting article and thought would like to share this with the community
Comments  / Improvements and points worth considering are welcome

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