Before selling shares of a stock, investors should consider factors such as market capitalization growth; market valuations; price growth versus earnings growth; surprises and momentum; and profit margins, reports Peter Hodson for Financial Post. The temptation to take quick profits or shore up against short-term losses often costs long-term gains.
As a company's market capitalization grows, its shares often jump as well. As of 2015, $100 million is a common point after which companies move out of micro-cap interest and their liquidity gets to the point where institutions and funds jump in, notes Hodson. Another bump in investment comes when market capitalization hits $1 billion. Once Sylogist Ltd. passed $100 million, its shares jumped 220 percent.
If company valuations are increasing, it is wise to hold onto shares of a stock, recommends Hodson. If earning are supposed to double, for example, the stock is likely to quadruple. However, in a time when earnings multiples are not likely to go up, even if valuations are rising, it is wiser to wait. If earnings are rising faster than the stock price, it is definitely not time to sell as the price is likely to catch up in the short-term.
When a company announces news that is a pleasant surprise, it is also a good time to wait. People looking to jump on the stock bandwagon only push the price of shares higher, so those who sell first get the least reward, explains Hodson. If improvements are coming in net and gross margins, and profits are on the way up, this is another sign the stock is a long-term plus to keep in the portfolio.