What it means
At the simplest level, a sale happens when a seller agrees a price with a buyer and hands over the asset for cash. For an investor, selling a share means giving up ownership and receiving the sale proceeds, minus any fees.
The difference between the sale price and what was originally paid creates a gain or a loss. Selling has tax and timing consequences.
In many countries, a gain on selling an investment is subject to capital gains tax, and the rate can depend on how long the asset was held. A loss may be used to offset gains elsewhere, within the rules of the tax system.
Investors sell for many reasons. They may need cash, wish to rebalance a portfolio that has drifted from its target mix, lock in a profit, cut a loss or move money into a better opportunity.
Emotional selling, driven by panic or excitement, tends to produce poorer results than planned selling. A sell order can take different forms.
A market order sells immediately at the best available price, while a limit order sells only at a price you set or better, and a stop order triggers a sale if the price falls to a chosen level. Short selling is a different transaction, where an investor sells borrowed shares in the hope of buying them back cheaper.
On research reports, sell is a rating that tells investors the analyst expects the security to perform badly compared with the market. Analysts use this rating less often than buy, partly because of the commercial relationships between banks and the companies they cover.
Readers should treat it as one opinion among many. Timing is rarely perfect, so many investors set rules in advance rather than guess.
Examples include rebalancing once a year, selling when a holding exceeds a set percentage of the portfolio, or selling when the original reason for buying no longer holds. Rules like these take the emotion out of the decision.
In practice
Real-world examples.
Example
An investor holds shares that have doubled in value and now make up half of her portfolio. She sells some to bring the holding back to a sensible level. The sale reduces her risk of a large loss if the share falls, and she may still hold the rest if she believes in the company.
Example
A manufacturer sells a delivery van it no longer needs for $15,000. The van's book value in the accounts was $12,000. The company records a $3,000 gain on the sale.
Example
A retail analyst downgrades a fashion chain to a sell rating after weak sales and rising debt. Clients who hold the shares review their positions. Some sell, while others decide to keep the holding because they disagree with the view or believe the bad news is already in the price.
Formula
Calculation
Gain or loss = (sale price x number of shares) - selling costs - cost of the shares
An investor bought 100 shares at $40 each, a cost of $4,000. She sells them at $55 each and pays a $10 commission. The sale proceeds are 100 x $55 = $5,500, and after the commission she receives $5,500 - $10 = $5,490. Her gain is $5,490 - $4,000 = $1,490.Case study
Seen in the real world.
Lakeview Investments is a fictional family partnership holding shares in a single local company that had grown to 70% of its wealth. The partners, led by Aisha, worried that a downturn at that company would damage the whole family.
They agreed a plan to sell in stages over eighteen months, using limit orders and spreading sales to avoid pushing the price down. This is an illustrative story, but the lesson is genuine. Selling gradually reduced the risk and the tax bill was spread across several years, and the partners reinvested in a diversified set of funds.
When the company's share price later dropped by a third, the partnership's total wealth fell far less than it would have otherwise. Aisha kept the plan documented so that the family could see the reasoning behind each sale.
Watch out
Common mistakes.
- Selling in a panic after a fall. Reacting to short-term price drops often locks in losses that might later recover.
- Forgetting tax and costs. Commissions, spreads and capital gains tax can reduce the profit from a sale.
- Holding on only to avoid admitting an error. A past price paid is irrelevant to whether the investment is a good one today.
Questions
People also ask.
What is a sell rating?
It is an analyst's recommendation that investors should sell a security because it is expected to underperform.
What is the difference between a market order and a limit order to sell?
A market order sells immediately at the best available price, while a limit order sells only at your chosen price or better.
Does selling always trigger tax?
Not always, because the rules depend on the country, the type of account and whether there is a gain, so you should check your local rules. Holdings inside some retirement accounts can be sold without an immediate tax charge.
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