How Timely Profit Booking Can Play a Role for Active Equity Investors

In stock trading, opinion varies as to when profits will be realized. But if you’re an active investor in the stock market and deal in stocks yourself, occasional, wise profit booking helps. However, inexperienced investors or those who don’t have the time to regularly track or analyze stock market movements may be better advised to take real advice from experienced professionals.

For those who like to tinker, here are some things to keep in mind about stock market profit booking.

Disadvantages of holding a stock for a long time without profit reservation

In stock markets, volatility and unpredictability are not an exception but a rule. Similarly, risk is an integral part of stock market transactions. The stock market moves up or down without much concern, and no one can predict with certainty when a stock will turn gold or dust. Many stocks were valuable or blue chip at one time, but became a penny stock or even died at a later date, and vice versa. This requires logical and occasional profit booking as the norm, after about a year, for an active investor. Thus, it is not desirable to sleep on your farm or marry a stock, blindly.

Holding a stock too long without genuine occasional profit-taking defeats the fundamental purpose of stock trading. Thus, this can be a hindrance for many players to stay active.

Delayed profit is denied profit. Everyone joins the stock market for extra income for the growth and development of their family, especially to build a fortune for their children. Postponing the reservation of profits for a long time can therefore discourage a player.
Without the reservation of occasional profits, the investment becomes a passive investment. Without occasional profit, one may be more subject to stock market shocks and turbulence, with the possibility of heavy losses.

When to book benefits?

Profit booking can be seen as a judgmental art

Profit booking can be seen as a judgmental art. Made by sound and timely judgment, it proves useful and gratifying, to instill new zeal and confidence. So, it’s a million rupee question like when to count profits. There is no rule or word to describe it. Indeed, in the words of market bull Rakesh Jhunjunwala, there is a golden rule in the stock market, which is that there are no rules. When circumstances/environment change, the market changes. Accordingly, the stock market is governed by the power of judgment, which varies from person to person. However, some of the following tips may help.

Selling at a logically fixed target price: Set a logical goal for selling a stock, the same way you set a logical goal for buying. Book profits as soon as the tentatively set target is reached, and judged in conjunction with the market situation and future prospects, without letting fear and greed overwhelm you, to the best extent possible. Most likely, after you sell your stock, its price may rise, but don’t worry, and if you are convinced of the value of a particular stock, it may add or re-enter a drop in price. Remember that there is no shortage of opportunities in the stock market. A lost opportunity is not necessarily an opportunity lost forever.

Prefer partial profit booking: For a valuable and promising stock, depending on your judgment, make a partial profit and can add more once the price seems right to you. This way, while you pocket a certain amount, you keep your precious asset!

Sell ​​after carefully observing the consolidation phase: Watch for the upward consolidation phase for the selected stock or stocks, and as soon as the price starts to move up and move within a tight range, consider selling your stock. Better to consider profit booking after a year of holding a stock.

Accounting result for a real rationalization of holding prices: Reserve profits from time to time, trying to lower the price of your stake, to the lowest possible level, to make your investment as safe and secure as possible with the coveted, long-term peace of mind.

A contrarian approach might prove more rewarding: When buying or selling, taking a contrarian view is often beneficial. In other words, as a general rule, sell when the majority is buying and buy when the majority is selling out of fear. Indeed, in turbulent times, nervousness often dominates and most people sell impulsively out of panic, regardless of the quality or value of a security. Therefore, buying or selling value based on conviction often proves beneficial in such a situation. An impressive example of this hypothesis is that people who bought stocks at the start of the pandemic phase of covid (sold by others in panic) profited the most during the post-pandemic period.

Patience pays: In turbulent times, having patience and being more vigilant, before rushing to sell, could prove more rewarding. Selling at the right time pays off, usually after a year of holding the stock, and gives confidence for a larger investment.

(The author is a former Indian government employee and worked in the agricultural sector.)

Disclaimer: The opinions expressed are those of the authors and Outlook money does not necessarily subscribe to it. Outlook money will not be liable for damage caused to any person/organization directly or indirectly.