Sitting on profits in a stock? Decide right when to sell it

There is no thumb rule as to when to sell a stock and when to buy one. Some suggest the safest bet is to sell a security when it advances 10 per cent from its recent bottom and buy it when it declines 10 per cent from its recent top.

Jul 17, 2015 06:07 IST India Infoline News Service

Everyone in the market asks you to buy stocks, but no one would tell you when to sell. While it is important to know the exact time when to buy a stock, it is equally important to sell a security at the right time and right price. But the problem often is that there is a strong element of sentiment attached to a stock price, which is what no technical analysis can predict and which is what often leaves an investor in losses.
 
Remember, you may be sitting on huge profit on your investment but you will make that profit only when you sell the security. Which is why you need to get the time right when you sell a security. Now, greed is an important part of investor psychology and expectations of more profit often do not allow one to get out of an investment even when one is making a good gain.
 
Often, even when a stock is falling, investors refuse to get out of it, thinking that it will see a turnaround and s/he will at least be able to recover the investment if not make a profit. Which is how disaster happens.
 
There is no thumb rule as to when to sell a stock and when to buy one. Some suggest the safest bet is to sell a security when it advances 10 per cent from its recent bottom and buy it when it declines 10 per cent from its recent top.
 
But, one very healthy way of looking at it is to have a logical, preferably well-researched, price target while buying a security and offload it as soon as it reaches that level. This will help you fight greed logically and leave you with no guilt feeling even is the stock keeps on rising even after you have exited it.
 
The second thing to look at is any change in business fundamental. Often the dynamics of economics may leave an industrial sector facing multiple headwinds with no near-term relief in sight. One should get out of security immediately in such a situation irrespective of whether one is sitting on profits or loss.
 
On the downside, it is equally important to have a target till what point one will have patience with a declining security. Most financial planners suggest dropping a stock if it falls 10 per cent. However, one risk tolerance level comes into play in arriving at such a decision.
 
Yet another trigger for exiting a security might arise when one goes for a portfolio rejig. One should then cater to that requirement as a balanced portfolio is what counts more than some extra profit here or some additional time there.

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