When it comes to selling your stock, there are no easy answers.
Many decisions revolve around what stock to buy and when to buy it..
Inevitably, there comes a time when you are faced with a decision on how you should react to sharp share price movements upwards or downwards.
Share prices may fall sharply for a variety of reasons, such as a poor earnings report or the slashing of dividends.
But when the converse happens, it may also present a problem for investors.
Soaring share prices may pose a different sort of problem.
Should you sell into the rally to lock in your profits, or continue to hold out for even better gains in the future?
Or perhaps you should even buy more of the shares at higher prices as the company may be on a roll.
The case for selling
If the share price surge was triggered by a temporary event, then it may make sense to sell on (undue) optimism.
There are cases where rumours or news in the grapevine causes an unexpectedly sharp share price boost, such as a potential contract win or an impending acquisition.
If the business has been floundering or struggling for months or years, then such an event could give its shares a new breath of life.
Long-suffering investors may then take the opportunity to exit at a healthy gain.
Another instance where selling makes sense is when the investment involves a cyclical company that experiences regular boom and bust cycles.
A big share price jump may coincide with the crest of a boom, thus allowing investors to happily lock in their gains and redeploy the money to another promising, undervalued investment.
One such example is APAC Realty Ltd (SGX: CLN), a company that provides property brokerage and consultancy services.
Its share price has more than doubled in the last year from S$0.34 to the current S$0.73.
Investors need to assess if the industry is cyclical and whether the group can continue to report strong numbers.
If not, it may make sense to sell into the rally.
Holding out for a hero
In most cases, though, it may make more sense to do nothing and just sit tight on your shares.
If the business you own is latching on to trends and growing swiftly, its share price should also shoot up in tandem with the rise in revenue and earnings.
When faced with such a situation, a doubling of the share price may just be the tip of the iceberg as there is much more to come.
Take the example of iFAST Corporation Limited (SGX: AIY).
Its shares were trading around S$1.06 at the start of last year but had doubled by August as the fintech company reported strong results due to a surge in interest in online trading.
The group had latched on to the trend of digitalisation that was accelerated by the pandemic, and investors who sold out at that point would have missed out on future gains.
Today, the stock trades at around S$9.57, more than quadrupling from its level back in August last year, demonstrating that there is no upper limit on how high a share price can go if the business continues to improve.
Loading up on a good deal
Other than selling or holding, a third scenario may also present itself — buying more of the stock.
A case could be made for increasing your position in the stock despite a doubling of its share price if the investment thesis has changed materially in your favour.
A good example of this is The Hour Glass (SGX: AGS), a retailer of high-end timepieces that owns 45 boutiques in 12 cities around the Asia-Pacific region.
A year ago, the retailer was trading at S$0.69 but its share price has since more than doubled to S$1.57.
A study of the business shows that it had paid its maiden interim dividend of S$0.02 for the fiscal year ended 31 March 2021.
And for its full-year results, the group doubled its final dividend to S$0.04, thereby its tripling annual dividend to S$0.06.
Its willingness to declare higher dividends and the resilience of its franchise make a good case for loading up on more shares.
Get Smart: Focus on the business
Ultimately, the decision on whether you should sell investment or not has to hinge on its business prospects.
If the company is displaying a hot streak that’s decidedly temporary, it makes sense to lock in the gains before they disappear.
But if a company shows a consistent pattern of steady growth that can last years or even decades, then selling it may allow you to enjoy a temporary burst of joy, but deprive you of many years of great compounding.
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Disclaimer: Royston Yang owns shares of iFAST Corporation Limited.