Booking profit on your investment is as important as making the investment itself. When you invest in stocks, it is critical to be aware of all the factors that can impact market movement and those that can impact the stocks you hold.
There are four main situations where investors must not delay booking profit. These are as follows:
- Company-specific news: If there is any positive news about the company, like business expansion or new product launch, then it goes on to create a positive sentiment about the stock in the market. This positive sentiment would lead to the more than usual buying of shares by investors, and eventually the share price will rise. When the share price is on the higher side, one may be able to meet investment target by selling the stock. One recent example is Pfizer, which saw a solid price rise after announcement that its coronavirus vaccine has proved more than 90 per cent effective in preventing infection.
- Earnings indicator: If the quarterly earnings of the company, whose stock you hold, are good and ahead of expectations, keep holding it. If the underlying variables change in such a way that can have an impact on business operations, then think of reducing your holding or selling the stock. Moreover, one should sell a stock when one sees better opportunities that have the potential to deliver higher returns.
- Sector-specific news: The recent RBI announcement that it has rationalised risk weightage of new home loans sanctioned up to March 31, 2022, and linked them to loan-to-value (LTV) ratios boosted home loan companies. The market immediately factored in the rise in profitability and its positive impact on the market valuations of these lenders. There was a smart rally in these stocks due to this positive sentiment built on expectation of a spike in home loan demand. During such sharp rallies, one can book profit if there is an uncertainty about the sustainability of the rally.
- Economic Indicators: Economic data plays a very important role in deciding market movement, and thus it can be cue to book profit. Positive economic data builds confidence among investors while weak data derails such confidence. Weak data compels investors to sell shares at current market price. When one sells shares at current market price, s/he actually locks in the gains and safeguards themselves against financial loss.
It is important that an investor remains informed and carries out a comprehensive research in order to be able to book profit at the right time. An investor can get the best returns on an investment by booking profit in a well-planned and timely manner.
Also, while booking profit, one should ideally encash only a small portion of investment, as it can deliver twin benefits. Firstly, an investor can secure the profit on a certain part, and secondly, the rest of the investment will continue to grow. All in all, the most important thing in all this is the timing.
(DK Aggarwal is the CMD of SMC Investment and Advisors)
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