It often is thought that the timing of purchasing and selling a stock in the stock market is the key to generating profit from investment. Few experts may argue that profit or loss is determined when the buyer makes the decision on which stocks to invest in; it is only that the buyer does not know this until they sell it. However, both are correlated i.e., if you do not sell at the correct time in the stock market today, not sufficient is gained from buying it at the correct price.
Having knowledge about the correct time to sell is linked to finding the right balance between your fear and greed. By using appropriate strategies, you might be able to keep your emotions out during the decision-making process.
- Price is up too fast
When the price of the stock that you hold instantly rises, you might want to book your profit instantly and move on. Note that there are times when stock prices increase in a short time-period for several reasons like low liquidity, speculation etc. These usually are the ones that make headlines, however, when cheap stocks become costly instantly, it is very unlikely to reach high levels. No matter whether it is a quality stock, ensure to book profits as well as consider purchasing the stock again at a lower cost later.
- If you bought an incorrect stock by mistake
As per fundamental analysis technique in respect to stocks to buy, it is crucial to know why you purchased the stock. Experienced investors conduct in-depth research on the company’s operating performance, business environment, top management confidence in growth etc. If the rationale behind the decision on stocks to buy today does not match after the permanent change or regulatory change in the business environment once you bought it, you might sell the stock. In case the rationale behind purchasing the stock was incorrect from the start or you think you made a blunder; you must sell it off before you incur losses, or you face an opportunity cost of failing to invest in a distinct company. Look for weakness signs in a business model i.e., if the earnings of the company were not as expected in the annual results or in case the company is losing its market share to competitors. Such analytical research can help you make a better decision.
If the stock price reaches an unsustainable level
Ideally, retail investors must book profits when valuation of the company is considerably higher as compared to its peers. Price to earnings ratio or P/E ratio is used for deciding company valuation and comparing it with peers. Also, ratio can be utilized to strike comparison of it against its historical records. This is a fair indicator to judge if the stock is underpriced, overpriced, or fairly priced, which helps decide whether it is the correct time to sell.
The benchmark P/E ratio can be used to estimate the stock’s share price. High P/E ratio is when share price is more than EPS (earning per share), which means shares are overpriced and most likely may view a price correction in future. This is the correct time to book profits as shares are overpriced in share market.
