One of the most frequently asked questions among stock market beginners is:
Why do stock investors sell their stock?
There are many reasons why investors may sell their stock. Unfortunately, sometimes the sudden sell of stock may be the result of unethical or illegal activity. Nevertheless, for the most the part, investors will sell their stock because of:
- Fear
- They are cash strapped.
- They want to take the profits and recoup their initial investment.
So let’s take a closer look at these three reasons.
Fear
Selling out of fear is probably one of the worst things that you can do in stock investing, but many investors do it. There is a quote from Friedrich Durrenmatt that says, “Emotions have no place in business unless you do business with them.” I mean think about it for a second….How many good decisions have been made when you were an emotional wreck?
So where does this fear come from? The media is the blame for the most part. The media, especially in the USA, is extremely powerful and, unfortunately, has a major influence on the actions of many people. Then you have your family and friends, who most of the time do not know what the hell they are talking about, telling you what will happen if you do this or that. And like the media, what your family and friends think has a major influence on your decisions good or bad.
To give you an idea of what acting out of fear can do to an investor check out this article 6 Money Mistakes Everyone Makes. In this article mistake number two highlights how investors dumped stock in 2008 when the Dow dropped by 700 points. In total, all in a five month period, investors dumped $31 billion in stock during 2008. According to a study done by Vanguard if those investors would have kept the $31 billion in the stock market it would be worth $63 billion today.
Cash Strapped
Some investors may be having a financial hardship and there only option is to sell their stock to raise cash. It has happened to me personally. I needed cash for something so I sold some stock that I had to raise the cash. It is similar to selling the extra car, pawning your stereo, or selling your old computer. On the contrary, investors may not be having a financial crisis at all, they just prefer to sell their stock and use the cash for a purchase. Remember that stock is considered an asset and can be easily converted into cash.
I Want My Profit Now
I consider myself to be a long term investor. This means that I like to find a company to invest in, invest in that company, and hold that stock for 5 years or longer with no intentions to sell. Other investors, who may consider themselves long term investors as well, will invest in a stock for the long term but once that stock is profitable they sell some of the stock to reduce or recoup their initial investment. Or they want to recoup their initial investment plus enjoy a profit.
Example: An investor buys 10 shares @$60 of Apple Computer stock in 2002 which makes their intial investment is $600. In 2012 each share is worth $600 which makes their 10 shares worth $6000 ($600 per share times 10). The investor decides to sell 5 shares @$600 and hold the remaining 5 shares. So the investor would receive $3000 ($600 times 5 shares) for the sale. The investor recoups their initial investment of $600 plus a profit of $2400.
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