It is said that the key to building wealth is to book profits in the stock market – but the question is, when should book profits? In general, any financial advisor would advise you to make a long-term investment but how for how long? – It has often seen that many investors make long-term investment strategies for 10-20 years in believing that the value will rise with time. But, in doing so, many investors lost the opportunity to book profits time-to-time. For better understanding let’s take an example, once there was a colleague of mine, more like a friend who once bought the 1000 shares of Unitech Ltd in 2005 around Rs. 4 (including split & bonus) to make a long-term investment for 15 years. In the year 2008, the value of the share comes to Rs. 546 approx. But, in believing that the price will rise, even more, my friend becomes too confident and careless to use a stop-loss or book profits. With the same mindset, he continued throughout the years.
After a couple of years, the value went down to Rs. 30 in the year 2012 where he lost the hope and sold the share in the loss. Now the share price of Unitech Ltd is around Rs. 1.50 per share in the year 2019. So, if he booked profits at regular intervals he could’ve increased its returns manifold.
Therefore, I would suggest you understand the importance behind booking profits and must use this strategy, if the shares become overvalued in your portfolio. By timely booking profits in the share market, you can protect yourself from any unnecessary risk. The emotional investors find it more difficult to book profits in the stock market since they get emotionally attached to their shares that they do not want to sell. By not getting emotional towards your stocks, you can easily book profits and can always re-enter when the prices are low.
Now you may be a little convinced from all of this. But, still, the question remains: When should book profits in the stock market?- As long as you don’t know when to exit the market to safeguard yourself and make profits, you may not end up like my colleague.
So, let’s check out!
When to Book Profits in the Stock Market?
The first thing I would suggest you is, “do not simply book profits because the market is rising or others are selling too.” – You know very well, how people start panicking seeing market unexpectedly. But, you’re not one of them. Since you are invested in a long-term investment, it is important to give more importance to the company, not the market trend. By monitoring the performance of your shares irrespective of the market conditions, you can take a much better decision regarding your investment.
Booking profits is a strategy that must well-executed If you are in the business of building wealth. And there are two situations where the investors must not hesitate when it comes to booking profits. Below we’ve mentioned those situations key points that you should look at the time of booking profits in the stock market.
1. Company News: When investing in long-term, the investor must not much care about indices volatility but the company where he/she invested in. Any news of company can rise or fall the value of share price. For example, if there is a company which is thinking to expand its operations and territory in other states of the countries, then it means the company has big plans that will attract investors towards its shares. This leads to excessive buying of shares which may eventually increase the value. When all that happens, investors can meet their financial goals by booking profits in selling the share at a higher price.
2. Economic Data: Economic data also plays a major role in profit booking. It tells about the overall health of an economy. Many economic indicators like industrial production, interest rates, gross domestic product (GDP), WPI, CPI, and so on. These data tell if the economy is performing well or not. If the overall outlook is negative, it will compel the investors for selling their shares. In doing so, they can book the profits on their investments without losing the opportunity. And when an outlook seems positive, can enter the market again.
Timing the market is very important when it comes to buying and selling. You need to know when to sell the shares and book profits so you won’t miss the opportunity to secure profits. Not only it will safeguard the investor and investor’s capital but also allow investors to continue their investments to grow.
I believe you liked our article on “When Should Book Profits “and must’ve found some useful information. Nevertheless, if you have questions or would like to add somebody, then please don’t forget to mention in the comment section below.