When to book your profit in Stock Market?

Stock Market | admin | January 5, 2011 at 12:21 pm

book profit in stock market All investment operations start with cash and end with cash. If cash at the beginning of an investment is less than the returns at the end and makes up for both time and risk taken, it’s billed as a successful operation.

Even if at peak, most investors find it hard to capture profits and take home that elusive cash. It comes only when you realise your profits.

Whenever you research a stock, you come up with a target price with a timeframe for that stock. For example, a stock at Rs 100 may have a target price of Rs 140 in a year.

If that target is reached earlier, you could review the stock to see if there are fundamental changes in the business and if these warrant a change in the target price.

If the stock does not reach the target price within the timeframe, you should revisit your assumptions and see if there is a case for holding on to that stock with an upside possibility. If you realise that there is something wrong with your assumptions and expectations, better sell out.

Many a time, you may have surplus money and want to invest for a certain timeframe, say, only a couple of years.

“In such a case, it is wise that when the time comes and you are making money, sell the stock and exit,” says VK Sharma, head, Private Broking & Wealth Management, HDFC Securities.

Of course, never commit your short-term funds to equity investments as volatility can take its toll and erode the value of equity holdings.

This is a strategy followed by HNI investors who believe in freeing up capital at regular intervals. One strategy followed by savvy investors is the free of cost (FOC) one. Suppose, you buy 1,000 shares of a stock at Rs 100. When the stock goes up to Rs 125, you should sell 20% of your holding (200 shares).

When it moves up another 25% or goes to Rs 157, you sell another 20% of your holding (200 shares). Sell another 20% when it goes up by another 25% or Rs 197. So, in the process, you have sold 600 shares and hold 400 shares. In effect, by selling 600 shares, you have recovered almost 96% of capital invested. The remaining 400 shares are almost free in your books.

“Booking profits consistently is a disciplined way to successful stock market investing,” says Vinod Ohri, president-equity, Gupta Equities.

The strategy works best when you could buy real bargains in overall distressed sentiments. Again, the point of entry is very crucial. If one buys into a stock that is about to enter a major downturn, there is little scope for this strategy. If you are investing in commodity companies, the strategy will not work in prolonged downturns. The strategy works best for those who want to hold on to good companies for the long term without blocking their capital.

Many investors use technical indicators for their exit strategies.

There is another faction that works with stop loss triggers on their ability to take losses, based on both stock and portfolio position.

You are best positioned to take a call on how much loss you can take. Before entering into any stock or investment, you should know your stop loss exit point.

Some investors prefer to exit when the stock becomes a long-term investment — that is, more than one year of holding period. But things are changing. The proposed changes in tax code may undo the benign tax treatment with long-term investments. Investors should be guided by their net of tax return objective.

“If in the short term, the stock price is offering the desired post-tax return, you should consider booking profits and paying applicable taxes rather than holding on to the position only with the objective of qualifying for long-term capital gain incentives,” says Amitava Neogi, executive director, Morgan Stanley Private Wealth Management India.

There is a possibility that by holding out for long-term capital gains, the stock price corrects below the purchase price and the gain evaporates. book profit in stock market

Special situation investors put their money with a clear idea of quantifiable risks and moderate returns. If any of the factors that create such special situations changes the course, they prefer to exit.

For example, withdrawal of a suitor in a merger or failure of an open offer or delisting offer is a strong ground to exit for a special situation investors.

In such circumstances, the investors should critically evaluate the risk reward scenarios and conditions governing the risk-reward equations.

Source: Economic Times