Monday, Oct 03, 2022
Outlook Money

How Timely Profit Booking Can Play A Role For Active Stock Investors

Occasional profit booking is critical for reaping maximum benefit from your stock investments. Without that, investment could become passive, prone to shocks and turbulence in the market, with a possibility of heavy losses.

If you are an active stock market investor who deals with equities on your own, occasional and wise profit booking is useful.

In stock market transactions, opinion varies regarding the timing of profit booking. But if you are an active stock market investor who deals with equities on your own, occasional and wise profit booking is useful. However, inexperienced investors or those who do not have the time to follow or analyse stock market movements regularly may be better off taking genuine advice from experienced professionals.

For those who like to DIY, here are some things to keep in mind regarding profit booking in the stock market.  

Harms Of Holding A stock For Long Without Profit Booking

In stock markets, volatility and unpredictability are not an exception but a rule. Likewise, the risk is an integral part of stock market dealings. The stock market turns its course up or down without much alarm, and nobody could predict with surety when a stock will turn gold or dust. Many stocks were valuable or blue chip at one point in time, but turned a penny stock or even became dead on a later date, and vice versa. This calls for logical and occasional profit booking as a norm, after a year or so, for an active investor. So, it is not desirable to sleep over your holding or wed a stock, blindly.

Holding a stock for too long without genuinely occasional profit booking forfeits the basic objective of stock market dealings. Thus, it may prove a dampener for many players to remain active.

Profit delayed is profit denied. Everybody joins the stock market for additional income for the growth and development of one’s family, especially for building a fortune for their kids. Postponing profit booking for long, therefore, may discourage a player.
Without occasional profit booking, investment becomes a passive investment. Without occasional profit, one may be more prone to shocks and turbulence in the equities market, with the possibility of heavy losses. 

When To Book Profit?

Profit booking may be regarded as an art of judgment

Profit booking may be regarded as an art of judgment. Done by judicious judgment and timely, it proves helpful and rewarding, to infuse new zeal and confidence. So, it is a million rupees question, as when to book profit. There is no rule or one word to qualify it. Indeed, in the words of market bull Rakesh Jhunjunwala, there is one golden rule in the stock market, that there is no rule. When the circumstances/environment changes market changes. Accordingly, the stock market is governed by the power of judgement, which varies from person to person. However, some of the following tips may help.

Selling at a logically set price target: Set a logical target for selling a stock, same as setting a logical target for buying. Book profit as soon as the tentatively set target is reached, and judged in conjunction with the market situation and future prospects, without allowing fear and greed to override you, to the best possible extent. Quite possibly, after you have sold your stock, its price might go up but don’t bother or worry, and if convinced in the value of a particular stock, may add or re-enter on a decline in the price. Remember there is no dearth of opportunities in the stock market. Opportunity lost may not necessarily be an opportunity lost forever.

Prefer partial booking of profit: For a valuable and promising stock, as per your judgement, book profit partially, and may add more once the price seems right. This way, while you pocket some amount, you retain your valuable holding!

Sell after watching carefully the consolidation phase:  Watch for the upward consolidation phase for the selected stock or stocks, and as soon the price starts regaining and moving in a narrow range, consider selling your stock. Better consider profit booking after one year of holding a stock.

Book profit for genuine price rationalisation of holding: Book profit occasionally, with an attempt to lower the price of your holding, to the least possible level, to make your investment safe and secure to the best possible extent with coveted peace of mind, for long term.

A contrarian approach might prove more rewarding: While buying or selling, adopting a contrarian view often benefits. That is, as a thumb rule, sell when the majority is buying, and buy when the majority is selling out of fear. This is because, in turbulent times, often nervousness dominates and most people sell impulsively out of panic, irrespective of the quality or value of a stock. Therefore, conviction-based value buying or selling often proves beneficial in such a situation. One impressive example of this hypothesis is that people who bought shares during the early covid pandemic phase (sold by others under panic), benefitted the most in the post-pandemic period.

Patience Pays: In turbulent times having patience and being more watchful, before rushing to sell, might prove more rewarding. Selling at an opportune time pays, generally after one year of holding the stock, and gives confidence for greater investment.

(The author is a former employee of the Government of India and has worked in the agriculture sector.) 

Disclaimer: Views expressed are the authors’ own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.