As a relatively new investor, you may already have a good idea of why investing in stocks can make a lot of financial sense for the long term and how frequent buying and selling may not be the best path for most investors to follow. With all of that said, even for long-term investors, there are times when selling some or all of your shares can be a wise decision.
Here, we will discuss how to sell stock, the different types of sell orders that can be entered and what you need to know to make this type of transaction.
Where is your stock held?
When you own stocks, it’s important to understand where the securities are custodied, or held. That could be with a discount brokerage firm like Charles Schwab, Fidelity, Vanguard or TD Ameritrade, or it might be with a full-service brokerage firm like Merrill Lynch. The shares could be held at a bank as well.
If you receive shares of stock through your company, they might be held at a transfer agent who is responsible for administering your company’s stock compensation plan. Or they could be held in your 401(k) account if company stock is one of the options.
It’s important for you to understand the process of trading stocks at the place where your shares are custodied.
The basics of opening a brokerage account
When you open a brokerage account, you usually will need to complete an application. While the actual form and process will differ from firm to firm, it typically will ask for some basic information:
- Your name
- Your address
- Contact information, such as your phone number and email address
- Your Social Security number or tax identification number
- Your employment status, annual income, net worth and investment objectives
Funding your account
After you open an account, you will want to fund it so you can begin investing. The main way to fund your new account is with cash or securities you already own.
If you are sending cash to the firm, you can send a check or transfer the money electronically. The brokerage will be able to give you instructions on how to complete the funding process. You also can transfer securities you already own to the new account.
Selling stocks: placing the order to sell your shares
The first step in the process of selling is to decide which stocks and how many shares to sell.
The reasons to sell a stock could include:
- The stock has hit your price target on the upside.
- The stock has dropped to your preset limit, and you want to cut your losses.
- You need to sell some shares to rebalance your overall portfolio to your target asset allocation.
- You don’t feel the stock is a good holding going forward.
- You are engaging in tax loss harvesting and have a loss in the shares you want to realize or have a gain you want to realize to offset a loss realized on other holdings.
There are a number of other items to consider before selling:
- Will you be selling all or some of the shares? If it’s some, which shares will you be selling?
- Is the stock held in a retirement account like an IRA or a taxable account?
- If the shares are held in a taxable account, was there a gain or loss in the shares since you purchased them?
Note that the sale of exchange-traded funds (ETFs) is done in the same way as the sale of shares of an individual stock.
Types of sell orders
Once you’ve made the decision to sell some or all of your shares, you need to decide what type of sell order to use.
Your choices include the following:
A market order is placed during the trading day and indicates that you want to sell now at the next trade price. Normally, this will happen almost immediately, but there could be a delay in periods of abnormally high stock market activity or if the stock is thinly traded.
A stop order is an order to sell or buy once the stock reaches a set price, known as the stop price. For a sell stop order, the stop price is set at a level below the stock’s current market price. Once the stop price is reached, the stop order becomes a market order to sell and will be executed at the next market price.
A limit order is an order to buy or sell stock at a specified price or better. In the case of a sell limit order, the sale would be executed at the limit price or higher. The limit order can be executed only if the share price reaches the limit price. A limit order does not guarantee execution of the sale transaction.
A stop-limit order combines the features of a stop order with those of a limit order to either buy or sell. On the sell side, once the stop price is reached, the order becomes a limit order. The stock will be sold at the limit price or higher. The advantage of this type of order is that the stock will not be sold at a price that is lower than the limit price.
Choosing a duration for your sell order
The timing of these types of orders can vary. If you initiate a market order, it typically will be an immediate situation, with the order being executed once you enter it.
Sell orders can be left open for varying lengths of time:
Day orders are good only for that trading day. If no other order duration is specified, then the order to buy or sell is a day order that expires at the end of the trading day in which it is placed.
Good-till-canceled (GTC) orders are pretty much what they sound like. These orders stay open until you cancel them or until they are executed. In reality, most brokerage firms will limit the amount of time a GTC order can remain in effect.
An immediate-or-cancel (IOC) order is a type of order that must be executed immediately. Any portion of the IOC order that cannot be executed immediately will be canceled.
Settlement: what happens after you sell
Settlement refers to the official transfer of cash to your account after you sell shares of stock. For stock sales, settlement occurs two days after the trade date, or T+2. For example, if you sell your shares on Monday, the trade should settle on Wednesday. The two days must be trading days — for example, if one of the days is Labor Day, it will not count as one of the two days.
If you hold the shares in street name (online with your broker), then this all happens automatically. If you hold the shares in certificate form, you will need to ensure that they are physically delivered to the broker within the T+2 time period.
It’s important to understand the settlement rules, as you will be restricted from withdrawing the proceeds from the sale until the trade has settled.
How much does it cost to sell stocks?
Trading costs, often called commissions, will vary from broker to broker.
For example, Vanguard’s fees for selling stocks range from $0 to $20 per trade depending upon the value of assets in your account and other factors.
There are no fees for Vanguard brokerage account holders who sell their Vanguard ETFs and ETFs and mutual funds from other companies if they’re traded online and certain requirements are met. The costs to trade by phone range from $0 to $25 depending upon the assets held at Vanguard and other factors.
Fees and commissions vary from broker to broker. It is a good idea to understand all trading costs prior to opening an account.
What are the tax implications of selling stock?
If you sell stock that is worth more than you paid for it, you will have a gain on the sale. If the stock is held in a taxable account, your gain likely will be taxed.
- If you held the share for less than one year, the gains will be considered short-term gains and will be taxed at your ordinary income rate.
- If the gains are long-term gains, meaning the shares were held for at least one year, they will be taxed at the long-term capital gains rate, which generally is lower than your ordinary income tax rate.
- If you sell the shares for less than you paid for them, you will have a loss. Losses can be used to offset gains on other sales or other income in some cases.
Buying and selling shares of stock is a normal part of the investing process. You should have a good reason for making a transaction with your investments. Additionally, you should understand the process of selling and be aware of all the costs associated with it.
Fees mentioned are accurate as of the date of publishing