When To Sell Stocks - When To Sell Stocks At A Profit

When To Sell Stocks: Stocks can be an important part of your investment portfolio. By holding securities of various companies, you could increase your savings, protect your funds against inflation and taxes, and maximize your investment income. It is important to understand that investing in stocks involves risk. As with any other investment, it's important to understand the risk-reward trade-off and know your own risk tolerance.

Let's look at three benefits of investing in stocks.

Increase: The long-term performance of equities is generally better than that of cash or fixed-income securities, such as bonds. However, stock prices fluctuate. Investors may want to take a long-term view of their stock portfolio, as the impact of stock market fluctuations tends to lessen over time.

Protect: Taxes and inflation can erode your wealth. By investing in equities, investors can benefit from better long-term tax treatment, which can slow or prevent the negative effects of these two factors.

Maximize: Some corporations pay dividends1 or special distributions to shareholders, so they can earn regular investment income and earn a higher return. In addition, the favorable tax treatment of Canadian equities allows their holders to retain a greater proportion of their income. (Note that dividends paid by non-Canadian corporations are taxed differently.)

Different actions, different benefits

The two main types of shares, below, offer different advantages to investors.

1. Ordinary shares

Common stocks are, as their name suggests, the most popular stocks among Canadian investors. Here are some of their benefits:

Capital growth. The price of a stock fluctuates over time. When it rises, shareholders can choose to sell the stock at a profit.

Dividend income. Many corporations pay their shareholders dividends which can be a tax-efficient source of income.

Right to vote. A right to vote means that the shareholder has a certain control over the choice of the directors of the company and the administration of the company.

Liquidity. Typically, common stocks are bought and sold faster than other securities like real estate, artwork, or jewelry. Investors can therefore buy or sell them for cash quite easily.

Advantageous tax treatment. Dividend income and capital gains are taxed at a lower rate than employment income and interest income from bonds or GICs.

2. Preferred shares

Preferred shares have the following advantages for investors:

A reliable source of income.  Typically, preferred stock has a fixed dividend that must be paid before that of common stock.

Higher-income. Preferred stock dividends are usually higher than common stock dividends. (Note: Both dividends receive the same beneficial tax treatment.)

Variety. There are many types of preferred shares, which differ in their characteristics. For example, some allow the accumulation of unpaid dividends, and others can be converted into common shares.

The Benefits of Dividends

By paying dividends, corporations distribute a portion of their earnings to shareholders. Usually, dividends are paid in cash quarterly. That said, not all companies pay it. For example, those that are still expanding may choose to reinvest their earnings back into the business for growth.

Dividends have various advantages for investors:

Yield: Dividends paid on shares can increase total investment returns.

Volatility: Dividends can dampen volatility by supporting the stock price.

Revenue: Dividends can provide investment income to investors.

Stability: Companies that manage their cash flow effectively tend to maintain their dividends or grow them. Business stability and earnings growth often result in a rising stock price over time.

Taxation: In Canada, the tax rate on dividends is lower than on interest income from bonds or GICs.

Increase. The long-term performance of equities is generally better than that of cash or fixed-income securities, such as bonds. However, stock prices fluctuate. Investors may want to take a long-term view of their stock portfolio, as the impact of stock market fluctuations tends to lessen over time.