Sell: What It Means, How It Works, Example

What Is Sell?

The term sell refers to the process of liquidating an asset in exchange for cash. Liquidation is a term used to describe the conversion of non-liquid assets, such as real property, stocks, or bonds, into liquid property, such as cash, through an exchange on the open market. For example, your house is a non-liquid asset, but when you sell it, you convert it into a liquid asset in the form of cash. A sale performed by a government may be referred to as disinvestment.

In investing, especially with options, sell generally refers to the act of exiting a long position in an asset or security. In investment research, sell refers to an analyst's recommendation to close out a long position in a stock because of the risk of a price decline. Most people invest in stocks to grow their assets—they hope that the stocks they invest in will grow in value. 

Understanding Sell

Since the act of selling an investment crystallizes a profit or a loss, depending on the initial purchase price, it may have tax implications for the investor. The profits from the sale of a non-liquid asset are known as capital gains and may be subject to capital gains taxes. Capital gains taxes apply any time you sell an asset for more than you paid for it.

If you’ve owned the asset for longer than a year, it will be considered a long-term capital gain and will be taxed at a lower rate than short-term capital gains. Capital gains tax on long-term assets is 0%, 15%, or 20%, depending on your tax bracket, while short-term capital gains tax rates correspond to regular income tax brackets. Capital gains from sales of stock are reported on Form 1099-B.

The selling of holdings is often disliked by long-term "buy and hold" investors. They may believe that market averages usually have positive performance over a prolonged period. However, selling may be a prudent course of action in many situations, especially when it needs to be done to rebalance an investment portfolio or to take profits out of the market.

Short Selling

By selling a stock that is at risk of a decline in price, investors can protect some of their investment from the risk of the stock losing value. However, some investors may choose to engage in what is called a short sell, which subverts the usual stock market investment strategy of “buy low, sell high” in order to help the short seller profit from a drop in the stock’s price.

Short selling is a two-step process. First, the short seller borrows the stock from a brokerage and sells it right away. The seller then expects to be able to proceed to step two, buying the stock back when it has dropped even further in price. If all goes to plan, the short seller can return the stocks to the lender and make a profit.

Example of Sell

John purchases 10 shares of ABC stock for $120 a share, for a total of $1,200. Through his research, he believes that the share price of ABC will increase due to an upcoming approval of the company's new pharmaceutical drug. The drug is approved three months after John purchased his shares, which results in a current stock price of $135.

John wants to hold onto the shares as he believes the company has further potential for growth and selling it after three months of owning it would result in him having to pay a higher tax than if he held it for at least one year, qualifying him for capital gains tax, which is at a lower rate.

In a year's time, ABC has grown, made an acquisition, and its share price is now $150. John decides to sell his 10 shares, which brings in a $1,500 sale. From his original purchase price of $1,200, John has made a profit of $300.