Let us start today’s discussion with an example. However, this is not investment advice, and the stock is being named only for educational purposes.
Some of you may know this stock – Central Depository Services Ltd (CDSL). It got listed on the exchanges in 2017. In January 2021, it was trading out Rs 500 per share. A year later, in January 2022, it was trading at nearly Rs 1600 per share – 3X returns in a year. Today, the share price is around Rs 1000 per share, down 35% from the peak.
Why are we discussing this example? It is an excellent example to showcase that if you don’t know the art of booking profits at the right time, you will have notional losses (lower actual profits). Please note that the example does not hold for long-term investors who invested in 2021 with a long-term investment horizon. However, if you had invested for the short to mid-term, exiting with a 3X return would have made a lot of sense.
All this is easy to say since we are talking about historical data. Therefore, let us shift our focus to the future and learn the art of booking profits to avoid losses in the share market.
Profit booking in the stock market
In the above example, the pain was not deep because you were still in profit. However, there would be investors who had bought the stock at Rs 1200 and still have it – now at a 15% loss. You may not want to be in such a situation.
Every investor knows that the stock market is volatile and unpredictable, and a single piece of information can do significant damage to stock prices. Also, no one can predict the direction with 100% accuracy. Therefore, if you have made gains, it is crucial that you book profits and not sit on your profits blindly (though there are some exceptions to this rule).
When to book profit?
Profit booking is an art of judgement. One can learn it only with time. Since it is an art, there are no predefined rules that you can read and adopt. If you are just starting and have not developed judgement, there are stock alert apps you can use – they tell you when you should sell stocks and book your profit. Let us look at how and when you should book profit:
- Selling at a set target price: Assume you bought a stock at Rs 100, and at the time of buying, you decided your goal was to make a 20% return on your investment. Therefore, when the stock price hits Rs 120, you plan to set it. If the stock is on an upward trajectory, it may be tough to make that sell call, but that is what you need to learn and practice – putting control over your emotions.
- Partial profit booking: If you are a long-term investor and the stock has given you excellent returns, and you are more than 100% confident that the rally will continue, you can withdraw a part of your investment. You can withdraw the capital you had invested. With this approach, your initial investment amount comes to you, and you continue to hold your best stocks.
- Take help from technicals to book profits: Every stock will have a phase in which it will rally – it could be an information-driven, result-driven, or future growth-related rally. There will be a point after which the downward movement will start, or consolidation will happen. If you have stocks that have gone on a similar journey, you can book profits and reinvest the amount in another growth stock. You can use technical charts to determine the consolidation phase.
- You have achieved your goals: You plan to accumulate Rs 5 lakh to buy a car in three years. However, you accumulated the corpus in 2.2 years. Instead of waiting, you can book profits and keep the amount in a safer asset.
- You are nearing your goals: Many investors would have planned to withdraw their funds between March 2020 and May 2020 to fulfill their goals. However, we know what happened back then – the market fell more than 40%, and some quality shares were down 75%. Therefore, you must book your profits before you come too close to your goals or exit date in the stock market.
You can follow the above points and master the art of profit booking at the right time. When you begin to practice, your portfolio will grow much faster. Also, it will help you minimize notional losses – which translates to gains.
It is awesome if you can make the sell (or exit) calls on your own. However, if you cannot, instead of leaving your portfolio on autopilot mode, let Jarvis take care of profit booking, portfolio management, and risk management while you focus on other essential things in life.