Q: I bought a stock about a year ago and it has since doubled in price. Should I sell to lock in such a massive gain in a short time?
I generally discourage investors from selling a stock just because it went up. Having said that, there's not a one-size-fits-all answer to the question.
It depends on your situation, why you bought the stock in the first place, and the financial implications of selling.
While there are many possible reasons to buy a stock, most can be placed into two baskets: Either you thought the business had lots of growth potential, or you thought the stock itself was a compelling value.
In cases of growth investments, it's almost never a good idea to sell just because a stock went up, assuming you don't need the money now. For example, I bought shares of Square for about $11 and the stock is currently at $75. I haven't sold a single share, because I believe in the long-term growth potential of the company. In fact, I might even buy more.
On the other hand, if your primary reason for buying a stock was its valuation, a dramatic rise in the share price could possibly be a good reason to sell. For example, if you bought a stock because its P/E ratio relative to peers was low, and after the rise that's no longer true, it can be good cause to sell.
Finally, consider the potential tax implications of selling. Unless you're selling a stock in a retirement account like an IRA, your profit will be a capital gain and could result in a major tax bill. So unless your reasons for selling outweigh the tax hit you may have to take, it could be a smart idea to hang on.
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