What is the right time to exit a stock?

Imagine a scenario.

You bought 20 stocks of a company at price Rs 500 today. Further, lets also assume that you have done a good research and the stock is fundamentally very strong.

Next morning, the stock price zooms to Rs 550 (+10%). What will you do? Will you sell the stock and exit?

Now, let’s move to two days hence. The stock price now rose to Rs 590 (+8%). What will be your next move?

When prices of the stock rises like this, the ‘greed and fear’ becomes in-charge of your actions. Here, you might think that let’s book the profit. You have already gained Rs 90 per share (+18%). What if the stock prices fell tomorrow? It’s better to book some profits and will enter again in the stock when the price is low.

But, while doing so you are missing out few points. Lemme highlight them:

1. You have researched the stock carefully and the stock has a potential to give huge returns. It might become a multi-bagger in the future. Why do you want to book a profit of +18%, when you can get +1000% profits?
2. You might also be thinking that you will enter the stock again when the price is low. What if the stock price never comes down? I mean, the company is fundamentally strong, and might give brilliant results in future. Why do you want to jump from the running train and want to catch it again?
3. Let’s imagine the scenario that you re-entered the stock. Do you know in such scenario you have to give the brokerage and other charges 4 times? I mean, 2 times when you first bought and sold the stock. And next 2, when you re-enter and will sell in future. Total 4 times brokerage.
4. Lastly, do you know that you have to pay capital gain tax of +15% for short term gains?

Overall, it’s not logical to sell the stocks if fundamentals are strong just to book some short term profit. Look at the bigger picture. Haven’t you ever wondered why the great investor’s like Warren Buffet, Rakesh Jhunjhunwala etc always invest for a long term?

Also read: 6 Reasons Why Most People Lose Money in Stock Market​

Next, you might say that the above case is a typical situation. I didn’t explained when to sell the stock

Here are the three cases you should actually sell the stock.

1. When the fundamental of the stock changes: For example, the company starts underperforming quarter-by-quarter, the non performing assets (NPA) of banking companies starts increasing at high rate etx.
2. When you find a better stock: If you find a company with better fundamentals, better performance and you do not have extra money to invest in your budget, then you should sell that stock and grab the better opportunity.
3. When you need the money: Do not sell the stocks just to keep the money in your saving account. Sell the stocks when you need the money like paying for a new house, new car, your kids tuition fee etx.

Overall, the holding period of a good stock if forever. Invest for long term and enjoy the ride.



I hope the answer is helpful to the readers. If you want to read the compete post, you can find it here: What is the Right Time to Exit a Stock?