Knowing when to sell

SMARTSHARE

As attentive investors, we tend to look for opportunities to buy. Rarely would we think of what to sell.

While selling what you don't have is a rare art that is not in vogue these days, keeping the mind open to possibilities of selling what you have is something that every investor should strive for.

Until you sell, the capital appreciation is only on paper and, therefore, likely to vanish if prices start tumbling. Conversely, your paper profits can continue to climb to dizzy heights if you don't sell them. The greed for more profits can continue to make you hold the stocks.

One needs to take a call as to when one should book profits.

Target is reached
When the target price of your stocks has been reached, taking a selling decision is easy. This discipline of booking profits will stand you in good stead as profits will be continuously booked and there will not be any cause for complaint if the stocks tumble.

Period gets over
Sometimes money is set aside to be invested in stocks for a particular period of time. Once the target period for which the amount was invested gets over, you need to convert the sum back into cash.

Temporary parking
Often, the savings are diverted to stocks as a stop-gap arrangement. For instance, you need to buy a house but find the housing prices too high at the moment.

So you may want to wait for the prices to cool down and may invest the amount in stocks for the time being. So whenever in the future you feel that the house needs to be bought, don't be greedy and over-extend the equity investment.

Need to rebalance
Sometimes, because of a relentless rise in a particular stock, the weightage of that stock in your portfolio would rise substantially, making your portfolio lopsided. Prudence demands that you reduce exposure to the stock to rebalance your portfolio.

This would mean pruning exposure to your best performing stock. So I suggest you revisit the stock's fundamentals and believe that the out-performance could continue for a while; keep holding the stock but put it on your watchlist to prune immediately when the stocks starts heading south. The bottomline here is: don't rock a steady boat.

Fundamental weakness
There could be a host of fundamental reasons why you should think of selling the stock that you have long owned. It could be the loss of market share, plunging margins, lower sales, an adverse merger ratio etc. There could be other telltale signs like insiders selling the stock. This needs to be differentiated from a deal in favour of a strategic investor or an institution.

Valuations are often touted as reasons for buying or selling. A stock, however, need not be sold only because it has a high Price Earnings (PE) ratio. Companies that have just turned around, niche players or companies that are going to grow at very high rates in the future, will tend to have higher PEs.

But if companies fail to deliver, then one would have to wield the axe.

Trailing stop-loss
Once a decision has been taken to sell the stock, investors can utilise the concept of a trailing stop loss to extend the gains. A stop-loss sell order is a contingent order that will get triggered only if the stock does fall to a particular price.

For instance, the stock you have decided to sell is quoting at Rs 550. You have reason to believe that the stock will go up but you need to protect your profits. So you may place a stop-loss order for the stock at Rs 540 as trigger and Rs 535 as selling rate.

If your stop-loss is not triggered, keep moving up the price each day till the stock gets sold. A stop-loss order strategy allows you to milk the upside potential of stock as long as the trigger is not hit.

Booking of profits is not a bad idea at all. Doing this generates liquidity, which is something that will come in handy when there is an opportunity to buy.