One of the important questions that are faced by investors of all types is when they should exit a stock. What is the right stock exit strategy? What is the right time to sell stock in order to earn profits? If you are vying to know the most appropriate stock exit strategy. In order to achieve your long-term stock investment goals, it is necessary to find an appropriate answer to this question.
Stock market investment is known to be a complex system and not everyone is skilled enough to manage various facets of investment successfully. And knowing when to sell the stock is important from different viewpoints. Let’s delve deeper into the topic and know more about the right stock exit strategy.
When you should not exit a Stock?
Before we go further in exploring various stock exit strategies, first, let us find out when it’s not the right time to sell. That is, what is not the right time to exit a stock.
Think of a case. You purchased 20 stocks of a firm at Rs 500 per stock today. Now, let’s also think that you did basic research and the stock is essentially very strong. Next week, the stock price goes past to Rs 550 (+10%). What will be your next move? Will you sell the stock and exit?
Now after a period of 2 days, the price of the stock reaches Rs. 600. What would you do now?
When prices of the stock go up like this, the ‘Greed and Fear’ take control of your actions. Here, you might assume that let’s earn the profit. You have already attained Rs 100 per share. What if the stock prices went down? It seems sensible to book some profits at present. But while doing so you are missing out on a few things. Let us look at them:
You did extensive amounts of time and effort reading this company, researched the stock cautiously and the stock has enough probability to give better returns. It might become a multi-bagger in the future. Why do you want to earn a profit of +20%, when you can get +100% profits or more?
You might also think that you will buy the stock again when its price is down. What if the stock price never takes a dive? It means that the company is basically solid and might give excellent results in the future. There are probabilities that you may never be able to enter the stock at the same buying price.
Anyways, let’s think that you re-entered the stock. Don’t you reflect that in such a case you need to spend more on extra brokerage charges and other charges? This way, you have to pay all the charges 2 times when you first bought and sold the stock. And next two times, when you re-engage and will sell in future. Almost double brokerage. Do you actually think it’s value paying this much brokerage just to get a profit of +20%?
Now, let’s look at some signs that indicate that it’s time to sell a stock Having a clear stock exit strategy is of immense value just like the efforts you put in evaluating a company before investing. Nothing can quite set the significance of having a clear exit strategy.
The fundamentals of a company are changing
Search for the quarter on the quarter presentation of the company. If you notice any kind of delay in reporting of growth numbers of the company is exhibiting continued deficit, then it is time to think and consider. However, check for minimum 3-4 quarters to initiate a call. In addition, check if the operation of capacity is downsizing or if the non-performing assets increasing. The top brokers in India suggest this way before exiting a stock.
Debt is also a major sign of a company’s future. A majority of stocks that went on to become multi-baggers fitted to businesses that had nil to insignificant debt. However, it doesn’t apply to NBFCs and Banks). Consider checking debt-to market cap ratio. It is an option to check the debt against a company’s capability to raise capital. Accordingly, the lesser the number, the steadier a company is. However, if you notice this number has gone p and reflects no sign of coming down, it is time for you to move out.
You may Also Like to Read : Upcoming IPO
The company has corporate governance issues
Corporate governance concerns should never be overlooked. Corporate governance indicates how proficiently a company manages stakeholder relations. The board of directors and the senior management must undertake activities that are in the best interests of internal and external shareholders including employees, customers, partners, and must have no conflicts or legal issues with suppliers, banks and other regulatory establishments. The company should be operated in a lawful and ethical way considering the industry’s best practices.
Being an investor, search for their disclosure policy just like you search for the best stock broker in India, the employee compensation policy, dividend policies, conflict resolution system between different internal and external shareholders. This information is revealed when the company is listed publicly. It is also necessary to consider how well and how quickly the upper management manages these hindrances.
What if you sell the stock?
It is always perplexing to determine your next step after selling the stock. This is particularly true for investors who stayed with the company for a long time. However, the truth is that one should look at the scenario practically and not emotionally. It is conceivable that the scrip price goes up after you exit and this may put you into the boundless coil of regret. You would have favored selling the stock at its optimum price however elegiac it is an unreasonable quest.