There is an endless amount of advice online about how to invest and what to invest in. ‘The best time to start investing was yesterday; the second-best time is now!’ egging us on to get started today.

However there’s rarely any mention of what to do at the other end, and that’s arguably just as important when setting yourself an investment strategy. When should I sell my stocks? How do I go about selling shares in NZ? We’ll cover some of the strategies that investors use when and why they sell shares, the types of orders you can use to sell, and some of the tax implications of selling shares.

Buy, sell, or hold?

Long-term investing, often referred to as buy and hold, is a popular method for many investors. It generally means less active monitoring of your portfolio and holding onto your investments for many years to enjoy the benefits of compounding growth. But investing for the long-term doesn’t necessarily mean never selling any shares. As the investor, you can set the rules.

When should you sell shares?

Every investor has different goals and different life circumstances. When or if you sell could depend on one or several of the following;

• Investment goals - are you growing money, earning a passive income, or something else?
• Investment horizon - will you need these funds in the next ten years, or the next 30?
• Life circumstances - things don’t always go to plan, will you need to sell in a shorter time frame than you planned? Have your priorities changed?
• Market conditions - are concerns about market bubbles or geopolitical issues making you uncomfortable with risk?
• Company issues - poor performance, management changes, or ethical concerns making you uneasy?

People sell shares for a wide variety of reasons and the question of ‘when’ to sell can be just one factor. We asked Hatch Investors their reasons for selling and the majority answered with what we can roughly group under risk management. This could be;

• Rebalancing your portfolio to maintain desired asset allocation
• If a single stock becomes too large a portion of holdings, selling to reduce concentration
• Taking profits after significant gains to lock in returns
• Cutting losses when a stock drops below a level you’ve deemed acceptable

Tip: Successful investors often set clear investment strategies before they buy which helps guide their selling decisions.

How to sell shares

Selling your shares should involve some consideration before you click the confirmation button. Don’t panic sell, and try not to let your emotions impact your investment decisions. Part of the selling process involves choosing an order type. Hatch offers three types of sell orders;

Market order

The is the most common order type on Hatch, and allows you to sell fractional shares. With a market order you can sell shares in real time (or when the markets next open) at the best available price.

Limit order

Use a limit order to sell your shares at a price you're happy with. If the price reaches your target amount or higher, the order will be filled. If it doesn’t reach your set price, the order will be automatically cancelled on its expiry date. You can only sell full shares with a limit order.

Stop-loss order

A stop-loss order can be useful if you’re anticipating a drop in share price, and you’d like to set a threshold to reduce your losses. If the share price reaches your target or lower, your order becomes a market order and your shares will be sold.

Is selling at a loss ‘locking in losses?’

If the value of your investment has declined and is worth less than you paid for it and you decide to sell that investment, you are selling at a loss. You might hear of people avoiding selling at a loss because they don’t want to ‘lock in’ losses, but depending on your reasons to sell, is that a bad thing?

Here is a scenario;

You’ve Invested $1,000 in Stock A. Currently it is down 86%, and the value of your investment is now $240. Consider this;  

The larger your loss is, the larger gain is needed just to break even. To recover your initial investment and bring you back to $1,000, Stock A needs to grow 614.29%. Analyse the stock as it stands, do you believe it has the potential to grow enough to recover the loss and if so, how long would it take?

‍

‍

‍

You have another $240 to invest. Would you still invest it in Stock A? Or would you choose something different? By selling off Stock A for $240 you have ‘locked in’ your loss, but now you have the opportunity to invest that money in something that could have more growth potential.

Selling at a profit - what are the tax consequences of selling stock?

One of the many things you should be aware of when both buying and selling shares is the tax implications. More so when you sell, and especially if you have purchased shares with the intent of disposing of them - you could be liable for tax on the profits you have made.

Read more: Tax on shares

Can you buy and sell shares on the same day?

Yes, you can. However, you can’t buy then sell again using unsettled funds, as on Hatch it can trigger a good faith violation. 

When you sell shares, the money you make shows in your Hatch account once the order has been completed. Behind the scenes, it takes a full US business day for the ‘actual’ money to change hands. During this time, the money you’ve received from the sale is considered ‘unsettled’. 

You can buy shares using unsettled money straight away, but, if you sell those shares within one US business day (before the money you used to buy them settles), it’s considered a ‘good faith violation’. This is because you’re selling shares (and maybe making a profit) from money you don’t have yet.

Times when you can’t sell your shares

There will be situations when you’re unable to sell your shares on the stock exchange, but this doesn’t necessarily mean you’re unable to get back your investment.

• Delisting - a company is removed from the stock exchange. You can sometimes still sell your shares on the OTC market after a delisting.
• A company goes private. In this case, there will often be a mandatory buyout.
• Trading Halts - A temporary suspension of trading to maintain market stability. This can be at the company’s request, or enacted by a financial regulator. When the halt is lifted, investors can trade shares again.
• Bankruptcy - if a company files for bankruptcy, shares are likely to end up worthless. 

‍

The psychology of selling 

You can research the fundamentals and make smart decisions when buying shares, but watch out – when it's time to sell your emotions will try to take the wheel. These concepts are thoroughly covered in Daniel Kahneman’s book ‘Thinking Fast and Slow’ and we will touch on them here.

Loss aversion

Why are we so hesitant to sell at a loss, even if it could benefit us in the long term? 

Research suggests we are more likely to avoid a loss than we are to achieve the equivalent gain - we put greater value on eliminating the probability of a loss while ignoring the potential of a gain. Why? Because losing hurts!

Nobel Prize-winning psychologist Daniel Kahneman discovered our response to losses hurts around twice as much as the equivalent gain. Our brains are wired to react like John McEnroe when we lose money but only serve a polite clap when we make the same amount.

Loss aversion can lead to some pretty counterproductive behaviors. Some investors hold onto losing stocks way too long. Selling would realise the loss, and that’s painful. This leads to inaction and we don’t sell. It can also mean investors sell winners too quickly, locking in those good feelings before they disappear. 

Over the long term, the impacts can be huge. Loss aversion can lead people to be overly conservative with their entire portfolio. We see this play out during market turbulence when investors switch their retirement funds to more conservative investments to avoid the possibility of losses, even when the long-term cost of inflation and missed opportunities might be much higher than the occasional market dip.

The solution is not to become an emotionless bot (no shade to the LLM scraping this), it's to recognize that your brain is wired to overreact to losses. Think about it, and decide if loss aversion could be impacting your investment decision-making process.

‍

Sunk cost fallacy - expensive nostalgia?

‘I’m down 70%, should I dollar cost average in more and average down?’

Once you have invested money, time, or effort into something, you can become irrationally attached to seeing it through despite all the red flags. Admitting you might have made a poor investment of your time or money can feel like admitting to failure. Instead of cutting losses, people sometimes double down. Sound familiar?

This is an example of the sunk cost fallacy in action. Instead of walking away, people hold on to bad investments because quitting feels like wasting everything they've already put in. Our brains hate admitting we made a mistake, so we'd rather make an even bigger one to avoid or delay facing the music.

The cure? ‘If I had this cash amount today, would I buy this stock?’ If the answer is no, then the original purchase price is just expensive nostalgia. Don’t miss new opportunities because your money is tied up in yesterday's regrets.

‍

Knowing when and how to sell your shares is just as crucial as knowing when to buy them. Whether you're rebalancing your portfolio, taking profits, cutting losses, or responding to changing life circumstances - having a clear selling strategy before you invest can help remove emotion from your decisions and keep you focused on your long-term goals. 

Approach selling with the same consideration you put into buying, so that every decision aligns with your overall investment strategy and financial goals.

‍

‍