Many investors are frustrated with the stock market right now. Stocks have fallen since the beginning of the year, and many people are seeing losses in their portfolios on the screen.
If you’re sitting on stocks that have lost a fraction of their value, you may be tempted to sell them now to minimize the financial hit. But if you’re going to sell stocks, it’s important to do it for the right reasons.
When it is profitable to sell shares at a loss
Selling shares at a loss may make sense if that particular company is doing poorly. Say you invested in a a pharmaceutical company which had several drugs in its pipeline that failed to move forward or gain FDA approval. It’s easy to see how such a situation could lead to a negative outlook for this company – and, as a consequence, a decline in the share price.
Similarly, let’s say you own a technical it’s consistently missed revenue expectations over the past few quarters, and it’s been hemorrhaging money. This is a stock that you can unload.
When selling shares at a loss is not profitable
It’s one thing to unload a stock you no longer believe in. But now is not the time to sell a stock simply because its share price is declining due to the broad market trend.
These days, a number of solid companies are trading at a lower price than at the beginning of the year due to the general decline of the market. But that doesn’t mean these stocks won’t regain their value once the broader market recovers. And being in a rush to sell the stock, as it could mean closing in on losses unnecessarily.
How to profit from losses in your portfolio
No one likes to lose money on stocks. But if you find yourself in such a scenario, the advantage is to take advantage of a strategy known as collection of tax losses.
Whenever you sell a stock at a loss, you can use those losses to offset capital gains in your portfolio. And if you don’t make any gains this year, you can use up to $3,000 of your losses to offset ordinary income.
In addition, losses can be carried forward from one year to the next. So let’s say you sell an underperforming stock and lose $5,000 in the process. If you have no gain to offset, you can apply $3,000 of that loss to ordinary income and then carry forward the remaining $2,000 to 2023.
Don’t make rash decisions
At a time when so many portfolios are declining, it’s easy to see why investors might be looking to sell stocks. But remember, you won’t actually lose money until you officially sell the stock for less than you paid for it. If you own stock in a company that is clearly in trouble, that’s a good reason to sell. Otherwise, it’s best to sit back and wait for it to be over.
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