The misfortune of seeing their investments soar in value led many investors to learn the skill of timing the market and book profits in order to lock the gains in the act of selling security. Entry-level investors who just begin investing in the stock market have learned of periodic selling of securities in order to earn high returns on their investments and are now eager to know when they should booking profits in the stock market.
There are certain situations that lead investors to book profits and cash out their stock investments. For example, when company-specific or industry-specific positive news hit the stock market, many investors start buying the stock of that company. This excessive buying led to a rise in the stock price. When that happens, the targets of many existing investors met and they start booking profits in selling out their shares. However, this profit booking in the stock market led to a short-term slump in the market. So, profit booking benefits investors who book profits and sometimes hurt those who hold onto their profits and do not sell.
Undoubtedly, an exit strategy is an important aspect of investing. But, it is easier said than done! The lingering question is, when do we sell?” Or “when is the right time to book profits?” Well, there is no one right answer to it because every individual has a view of booking profits in the stock market. Plus, it hugely depends upon stocks to stocks. Nevertheless, one should put some thought into it and find a systematic way of booking profits.
Booking too soon
Investors, unlike traders, buy equities for long-term investment. In such a case, the profit booking rises under two situations; first, if you are need of cash flow to achieve the specific financial goals for which the investment was made, and secondly, for portfolio rebalancing. The former is easier to uphold as you will need to sell the security to have that kind of money. However, it is important to ensure that the reason for the profit booking is to fulfil certain goals and not deviate from it. For instance, if the goal was to save for home loan then do not divert your money in paying for a car.
Sometimes, investors sell too soon instead of waiting to finish the cycle. The fear of losing made them book profits way too soon. It is a typical mistake to sell the stock over some small gains. Contrary, if the stocks have given good gains are likely to continue giving in the future.
The equity market has always known for its extraordinary swings which have a direct impact on investors’ portfolio. The immense volatility left investors with differential returns over time. So, it is important to rebalance the portfolio to restores its initial asset allocation. However, while doing it, many investors made a mistake of frequent rebalancing or rebalancing over minor shifts in assets. This results in extra costs that outweigh the benefits of profit booking.
So, it is important to look for profit booking only when the targets are higher to compensate for extra costs over selling securities.
Profit Booking Example:
If the equity allocation has become at least 10 per cent more than stipulated allocation then you can indulge yourself in the process of profit booking but if you rebalance for every 2-3 per cent shift in allocation then there will be higher chances that you will end up paying more on commissions.
Final Thoughts: –
Ultimately, profit booking depends upon your financial objectives and asset allocation. So, the right time to book profits is when you come into under such circumstances otherwise no one shouldn’t book profits simply because the market is at its peak or everyone is selling.