The decision to exit your stock holdings is never easy. But it is important to keep profit-booking for better returns.
Ankita, a software professional, saw her equity portfolio bought for a value of Rs 200,000 in May 2009 rise to Rs 240,000 in mid-October 2009, a return of 20 per cent in five months. Since then, due to volatility in the market, the value has come down to Rs 210,000 in the span of a month. Her objective to invest was to make some quick gain for a defined purpose. However, due to greed, she did not sell out and now is ruing her decision not to sell. Most of us have been through this situation. We try to figure out our notional gains when the market is moving up. In a downturn, due to fear, our tendency is to cut losses and to sell the stock at lower prices. The question, then, is when to sell your stock.
Selling stock is a difficult decision; purchasing it is much easier! Like most investment decisions, selling of stock should be by way of an informed decision. Unfortunately, for many investors, it is done out of sheer panic. They sell when their stock go into a downturn. The selling in such cases is mostly for emotional reasons, rather than as a part of well-thought investment strategy.
WHY SELL?
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Just like we have strategies to buy stocks, we should have a strategy to sell stocks, too. Before you buy a stock, you should consider both your motive and your time frame. Monitor your investment and make your decision to sell based on this goal. If you reach your goal before your time frame, you can sell, knowing well that you have achieved your objective. But if your scheduled time passes and you're not even close to your defined goal, you may have to consider selling or to readjust your time schedule.
It is important, as in the dynamic environment we live in today, more often than not, it is possible to earn better returns by booking of profits at regular time intervals. Some of the strategies possible for selling stock are discussed below.
One reason to sell can be to meet financial goals. Suppose you had invested with your son's education or daughter's marriage in mind or to buy a house or go for a vacation. In such cases, it is advisable to book profits 'in time', to be able to spend.
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Selling of stocks may at times be necessary to balance your asset mix. Suppose you have decided to have an asset mix for equity and debt at 50:50. Due to the rally in the stock market, the asset mix changes to 60:40. In such cases, it is advisable to book partial profits in stocks and invest in fixed income instruments to rebalance the portfolio. As you grow in age, it is always advisable to tilt your portfolio more to fixed income instruments rather than stocks.
Many investors have a 'stop loss trigger' for individual stocks. Stop loss means in case a price reaches below a particular level, then the investor would like to exit the stock. By having a pre-decided stop loss, an investor can minimise his losses.
Changes in fundamentals have a great impact on the value of the stock. Sometimes, a company's basics may become so weak that it is advisable to sell the stock. Similarly, entry of new competitors or a tariff war can lead to decline in stock values. A good example is the decline in share value of telecom stocks due to introduction of per-second billing.
Selling may also be needed due to misgovernance or wrong management practices followed by companies. Or due to incorrect accounting practices followed by companies. Stocks are also affected by changes in management. For instance, exit of a competent CEO may affect the value of stock. This is mainly seen in case of PSU stocks, especially of banks, where the exit of a high-profile CMD has caused in underperformance of these stocks.
At times, selling of stock may be necessitated due to alternative investment avenues which may have better potential returns. This could be gold, commodities, real estate, bonds, etc or even art. Investors should note that new and attractive asset classes will continuously evolve over a period of time. Having exposure to these emerging asset classes is always recommended.
Investment entails not only informed buying but also having a proper strategy to sell. 'Buy and hold' may not yield desired results if proper monitoring of the investment is not done. Booking of profits is as important as buying at regular intervals. Remember, buying or selling of stocks nowadays is just a click or a phone call away. So, do sell stocks to book profits and generate wealth. By doing so, you reduce the risk of losing your money.