The fine art of knowing when to sell stock

In the recent turmoil of the stock market it is easy to see the results of many investors selling their shares.

Perhaps they have all done so for the same reason.

Given the state of the market and expectations for the next year, it would seem a sensible thing to do. One commentator has said that he will be holding his nerve, showing patience and enjoying the dividends from his investments.

In more normal times investors buy and sell. Institutional shareholders sell shares for many reasons and, in a recent survey conducted by YouGov for the Quoted Companies Alliance and the accountants RSM, we asked what were investors’ principal reasons for selling shares.

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The answers we received showed that the drivers were varied – relating to the performance of the stock, good business performance, macro-economic changes, other opportunities presenting themselves and material changes within the business itself.

So let’s look at one or two of these factors in a little more detail.

Some of the underlying situations relate to the way a portfolio is managed.

For instance investors pointed out that a good stock could have become too large a proportion of the portfolio; this creates a change in the risk profile of the portfolio and needs to be addressed.

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Another reason may be that the stock is no longer included in the index against which the portfolio’s performance is benchmarked. This may mean that a good stock has moved into the higher index from say a small-cap to a mid-cap index.

Selling may also indicate that a particular investment’s time-horizon has been met, often a factor for a venture capital trust.

Alternatively there may be other stocks in the same sector or industry which show better potential – another reason to sell.

All of these are before the more judgement-driven reasons expressed, such as worries about accounting, profit warnings, management or strategic changes, impact of new competition or cash flow and debt problems.

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As you can see, there are many reasons why a seasoned investor might sell.

Some seem counter-intuitive – selling when a company is doing well – but all appear to be rational portfolio behaviour.

What this adds up to is best summarised by an investor who spoke at an event for companies that we held not so long ago, who said, ‘Be under no illusion that if I invest in your company there will come a time when I shall decide to sell your shares.’

Selling by an institutional investor can be a positive signal about a company; discerning whether this is the case is difficult.

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‘Bearish’ behaviour is not always reaction to market movements.

*Tim Ward is chief executive of the Quoted Companies Alliance, an independent membership organisation that champions the interests of small to mid-size quoted companies.

Their individual market capitalisations tend to be below £500m.

There are nearly 2,000 small and midsize quoted companies in the UK, representing 85 per cent of all quoted companies.

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They employ 4.6 million people, representing nearly 17 per cent of private sector employment in the UK.

The QCA aims to identify the issues that matter to its members, keep them informed and use its influence to benefit members.

Mr Ward’s past roles include head of issuer services at London Stock Exchange and finance director at FTSE International.

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