We all have been intrigued by the philosophy of stock investing. As human beings, we are engrained to yearn for investment and see our wealth grow substantially. But making it big in terms of investment is a two-fold story. For every investment into the market, you also need to book your profits if you want to realize the gains.
The concept of profit booking although a common term is still unknown to many. We here look at what profit booking means and will further seek the importance of profit booking down below.
What is Profit Booking?
Profit booking is a concept which means liquidating your investment into cash. It refers to the situation where you cash out your investment and book the profits. The concept of stock investment is pretty simple; you invest your money into the stocks with a goal to seek wealth creation in the long run. The stock rises in values which will increase your wealth substantially. But that increase in value is nominal in nature until and unless you realize it in the form of profit booking and turn it into real form. This step of changing the nominal wealth into real wealth can be interpreted as profit booking.
Importance of Profit Booking
There are plenty of benefits of profit booking in the share market. We here will list them down below and brief you on it.
- Liquidity: A major reason to book profits is to ascertain the liquidity in times of the volatile market. The stock market is pretty dynamic and ever-changing and is at its most volatile stage in comparison to the earlier times. Even the global scenes affect the market pretty much. So booking profits when the market is favourable will allow you to maximize your gains. It allows you to liquidate your investment and use it in times of need. It’s not that to say you cannot reenter into the share again as you can reinvest later on and again start your part of booking profits.
- Control on emotional bias: We often tend to be emotional towards investment. When we invest in the stocks we make an emotional bonding towards it to such hilt that we don’t want to sell it off. We hold the stocks and see the appreciation growing on for it. Rather than selling and booking the profit, we tend to hold on waiting for the price to further increase on. But one thing we forget is that the entry and exit into the share market are pretty easy unlike in the cases of real estate and other investment. We can understand the bond in such fixed assets but when it comes to the sharing market, you have ample opportunity to book the profits whenever you get the opportunity.
- Rebalancing of portfolio: When we start our investment journey we tend to have an investment goal in mind and based on that we set an investment ratio. For say, you have opted for an 80 per cent equity and 20 per cent mutual fund. With time, the market dynamics will change and with that your asset allocation ratio will change. So it is advised to make timely changes into your portfolio so as to bring it in line to the initial goal. This is where profit booking will help you around. With profit booking, you can sell off part of your asset and rebalance the ratio on offer.
The concept of profit booking is a great thing as it allows you to gain an upper hand in the times of volatile market and even gain access to liquid cash at the earliest something that won’t be possible with other types of investment. Profit booking is a strategy that a stock trader or an investor should utilize much often. Booking profits also help you to transform that nominal wealth into real wealth.