personal finance

When should you exit a stock?


Vibha is a banker and likes to invest in direct equity shares. She believes she has a knack for picking the right stock at the right time. But her recent analysis of her portfolio showed up that she’s had some hits and misses. She might need to work on her exit strategy as she fails to book profits on many of her stocks. She does the research while picking the stock and has mastered the approach on how to enter a stock, but fails sometimes when it comes to exiting. She has realised that as an avid equity investor looking to build wealth, she will not be able to make money from it, unless she gets both her entry and exit strategies right. She is looking for help on devising an exit strategy.

Investors like Vibha live in the hope that the stocks they hold will become mega performers, backed by their analysis at the time of investment. They get anchored to a particular price level and believe that a stock that has fallen will bounce back soon. Often, a scrip may take more than a decade to regain investors’ fancy and never touch its previous peak or potential value, as seen in the case of Suzlon,

, Vakrangee, etc. Investors become reluctant to sell a stock at a lower price, assuming the fall is temporary and the price will recover. This tendency to get anchored causes them to lose out on opportunities to book mega profits.

As a bottom-up investor, Vibha must sit up and take notice of the very high number of ‘buy’ calls accompanied by glowing media coverage. Unless the company is constantly getting re-rated owing to its growth potential, all positives may have already been factored into the price. Therefore, among the best times for Vibha to sell a stock is when everything is going right for the company. Similarly, when fancy for a sector is at its peak, it is usually a good time to reduce exposure to it—pharma, NBFC, infrastructure, real estate, retail sectors have all seen their growth cycles. Also, long-term investors like Vibha must be ultra-sensitive to corporate governance issues. Further, higher the debt, higher the possibility that the company could run into problems. Some of the best long-term wealth creators in the past few years have been those that have either zero or negligible debt, companies like

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, , , and so on.

Vibha must realise that a company’s share price could move up after she may have exited it, as no one is able to exit at the peak. Instead, she must focus on the companies she holds. Finally, bear in mind that the effectiveness of her exit strategy will determine the quantum of wealth she is able to generate in the equity market. While there are no sure shot answers to when is it the right time to sell a stock, she could use these pointers that will tilt the odds in her favour

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)



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