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Art of the sale: When should you sell a stock?

April 5, 2013: 7:18 AM ET
Deciding when to sell a stock can be difficult. But all investors should have rules that they follow.

Deciding when to sell a stock can be difficult. But all investors should have rules that they follow.

By Christine Romans, CNN correspondent and host of "Your Bottom Line"

When to sell a stock?

Easy. When you've either made some money on it, or you don't want to lose any more.

The concept is simple: Let your winnings run, and cut your losses early.

It's the execution that's tricky.

Related: Quality stocks may not have peaked yet

Plenty of market veterans have rules, formulas and even superstitions, when it comes to when to sell a stock. A legendary Chicago bond trader told me years ago his trick. If he wasn't making money by 9 am, he'd sell and go home. It's not really practical advice for the average stock investor in a 401(k), I admit, but record highs in the Dow Jones Industrial Average and the Standard and Poor's 500 are as good a time as any for a hard look at the art of selling.

1) There's the 25 percent rule.

"Most stocks that have great earnings and sales will run up historically on average, about 20 - 25% before they begin pulling back in price," says Amy Smith of Investor's Business Daily. "So you might want to start thinking about locking in some profits at 20-25%."

2) Sometimes it's best not to watch the stock prices, but the company's earnings trajectory.

Ned Riley, Chairman of Riley Asset Management, says when earnings growth begins to slow, the stock often follows.

"The first thing I tell people is to watch the momentum and earnings year over year. If there is a deterioration in the growth rate of a company's earnings, then one should be wary."

3) Don't buy the highs.

The last stages of a bull market can often be the most lucrative, but it's always better to take profits after a long run, than get into the last moments. And make no mistake, this bull is long in the tooth.

"The market has been going for one year, two years, three years, four years, it's a great bull market," says Carter Worth, Chief Market Technician at Oppenheimer Asset Management. "But history shows that when you have very euphoric bull phases, they give way to corrections. It's a normal thing. From a November low, we're up about 20 percent. And at this point, this is exactly where a normative pullback or correction or pause occurs."

4) And then there is this, legendary advice from the world's most famous investor, Warren Buffett.

"You want to be greedy when others are fearful and fearful when others are greedy."

Check out CNNMoney's Fear and Greed Index to see just how fearful or greedy this market has become.

For more on the art of the sale, watch "Your Bottom Line" Saturday at 9:30am eastern on CNN.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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