Everyone tells you when to buy a stock but when to exit a stock is a more important question.
Humans are generally greedy, and it has no limit but can make you fall from great heights to the ground in a second. We always want more, the “greens” in your portfolio can be very pleasing but it can turn into “daunting red” as quick as a dog latching onto a bone. But the stock market is a funny business, one can sell a stock at early profits which can turn into a multi-bagger later that causes big regrets. Selling a stock at the right time is one of the most underrated aspects of the stock market.
One thing that we all know for sure is that the stock market and risk walk hand in hand. The risk can be big or small but nobody is happy losing money irrespective of the amount. The stock market is volatile and can make you rich when dealt with smartly but can also give you fearsome nights.
It is clear that both an early as well as a late exit can work negatively for us.
When Is The Right Time To Exit?
🌟Knowing when to sell a stock is as important as determining the entry points if not more.
🤔What is your exit strategy?
#StockMarket #investing #trading pic.twitter.com/Qni7SiksLn— Trinkerr (@Trinkerr_IN) February 12, 2022
On Attaining Targets
One of the most common mistakes that we make when entering the stock market is not setting a target. Without a fixed goal and favorable price movement, greed doesn’t allow us to exit the market. Overstaying means an increased risk of correction in the volatile equity market. Even if the target is hit earlier than expected, it would be beneficial to exit gradually.
Problems with Corporate governance
“A major red flag to exit a company is when there starts developing corporate governance issues in the company and there are no actions being taken to correct them. Even in a bull market, sometimes these things are ignored, but once the negative trigger is activated for the stock, the same can be like a falling knife and it becomes difficult to get a timely exit,” – Tarun Birani, Founder & Director – TBNG Capital Advisors.
Underperforming in terms of profitability
The investor is only as profitable as the business itself. The operating profits of a company are a good indicator of how good or how bad the company is doing. Continued declining profits could be a trigger and a sign to exit from the stock.
Factors other than profits
Profits are an honest indicator of the company’s performance, however, there are parameters beyond profits that must be studied as well. Deterioration in the company’s fundamentals, rising competition in the industry, stagnancy in the top and bottom line are some of the factors that must be considered to gauge the long-term growth of the company. When the growth strategy and supporting parameters aren’t strong enough, it is a good time to take an exit.
Stagnant stock prices irrespective of good financials
A lot of times, the stock prices of companies do not rise (or fall) even when they are reporting good profits. In such situations it is important to remember that the market starts pricing any future industry or company specific headwinds that may curtail the growth of the company at the earliest. Sometimes numbers simply hide the internal issues.
Overvaluation in Short Term
The share price of a company may go high with time. However, when it rises too high too quickly, it shows overvaluation and that a good exit is near.
Unfavorable government policies
Government policies can make share prices rise and fall too much in a short span of time. One should consider exiting if government policy is negatively affecting the company.
When cutting exposure or a partial exit is smart
Even when there is scope of future gains in a particular stock, if it has given huge amounts of returns already, it would be wise to book some profits and re-enter the market at an appropriate time. There is no fixed way to value whether a company is trading at “too much premium” or not, but if it has given very high profits, the overvaluation may soon reduce prices and give another chance at entry.
However not every slight distress is a trigger for exiting the market especially when dealing with high capital stocks. Impulsive exits from good quality stocks may make it difficult to re enter in the market for the same stocks.
Conclusion
There is no hard and fast rule to finding the perfect time to exit. Neither of these triggers can alone predict whether a particular share price would act unfavorably for the investor or not. Simply judging from the scale of the company may not do justice to the price and prediction. It is often seen that big companies become bigger over time. A lot of times even negative policies, downgrades and no profits are unable to push the prices down. Selling a stock is difficult, but these triggers help most of the time.
