One of the key questions that even experienced investors are not able to answer is What is the Right Time to Exit a Stock? When should you sell the stocks and book profit? Or what should be the stock exit strategy for the investors? Knowing the Answer to this question is crucial if you want to have a successful stock market career.
Do you remember the story of the brave Abhimanyu from Mahabharata? He was a great Warrior, the son of Gandhivdhari Arjun and the student of Almighty Krishna. Although he was one of the best warriors in the legendary story, he went through a fatal end just because he knew how to enter a ‘Chakravyuh’ but didn’t know how to exit.
Similarly, the stock market is a Chakravyuh and you should know both how to enter and exit. The selling strategy of a stock is as important as the entry strategy. In this post, we are going to discuss the exit strategy for an intelligent investor. Be with me for the next 5-6 minutes to learn the right time to exit a stock for best returns.
What is not the Right Time to Exit a Stock?
Before looking at the stock exit strategies, first, let us look into when not to sell. That is, what is not the right time to exit a stock.
Imagine a scenario. You bought 20 stocks of a company at price Rs 500 today. Further, let’s also assume that you have done fundamental research and the stock is fundamentally very strong. Next week, 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 (+18%). What will be your next move?
When prices of the stock rise like this, the ‘Greed and Fear’ take 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? It’s better to book some profits right now. But, while doing so you are missing out on a few points. Let me highlight them:
You have spent a lot of time analyzing this company, researched the stock carefully and the stock has a potential to give greater returns. It might become a multi-bagger in the future. Why do you want to book a profit of +18%, when you can get +100% profits or more?
You might also think 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. There are chances that you may never be able to enter the stock at a similar buying price. Why do you want to jump from the running train and want to catch it again?
Anyways, let’s imagine the scenario that you re-entered the stock. Don’t you think that in such a scenario you have to give the extra brokerage charge and other charges (including the time that you spend to re-invest)? I mean, you have to pay all the charges 2 times when you first bought and sold the stock. And next two times, when you re-enter and will sell in future. Total double brokerage. Do you really think it’s worth paying this much brokerage just to book a profit of +18%?
Lastly, do you know that you have to pay a capital gain tax of +15% for short-term gains? For long-term investment (over 1 year), the capital gain tax is lesser i.e. 10%.
Overall, it’s not logical to sell the stocks if it is fundamentally strong just to book some small short-term profit. Look at the bigger picture. Haven’t you ever wondered why the great investor’s like Warren Buffet, Rakesh Jhunjhunwala, RK Damani etc always invest for a long term? How will you get a multi-bagger return if you never give your stock the opportunity to grow?
Let me Explain this Concept Further With the help of a personal example.
I’m invested heavily in stocks and bought the stocks of TITAN Company at a price of Rs 314 per share in November 2016. I liked the products of Titan Company. The company is fundamentally very strong and the stock was selling at a discount during that time because of demonetization.
On June 5 2017, the share price of Titan rose +18% in just a day. A positive news regarding GST was out which said that the taxes in jewelry sectors was going to be reduced. The news was taken enthusiastically by the people and that’s why the stock price rose too high of Rs 561 that day. Here is an old screenshot that I used in another post on Trade Brains to explain my investment.
Anyways, I didn’t sell my stocks that day. You might argue that I should have booked a profit (+70% from my entry price within 6 months). However, if you see from my perspective, it wasn’t the right time to sell.
There were a couple of reasons why I didn’t sell my stocks at that time. First, the rise in sudden price was due to good news. However, the fundamental of the company didn’t change. The company will continue to give good results in future.
Second, I might never be able to buy the stock at such bargain price again like the price during the demonetization period.
Third, I didn’t really need the money that time. If I had to sell my stocks, then I had to search again for a better stock to invest, which would have taken a lot of my time & energy.
And it seems my decision was right. The stock did correct its price that year. However, over the long run, the price went on moving forward. As of May 2021, Titan stock is trading at a price of Rs 1,451 per share. A return of over 4.6 times on my investments.
Next, you might say that the above case is a typical situation. I didn’t explain what is the right time to exit a stock? Here are the four cases when you should actually sell the stock.
What is the right time to exit a stock?
Here are a few of the scenarios when you should sell your stocks:
1. When the fundamental of the stock Degrades: Sell the stock when the fundamentals of the company are not the same anymore like when you bought the stock. If the fundamentals of a company are continuously degrading Quarter-on-Quarter or Year-on-Year, like the Revenue/profits are continuously declining, the company is not coming up with any innovative products, Management is not taking the right decision, competitors are doing way better, then it might be time to sell that stock.
For example, if the non-performing assets (NPA) of banking companies start increasing at a high rate compared to when you initially purchased it, then get ready to exit that stock.
2. When the Company Becomes Extremely Overvalued in Short time: In general, the share price of a fundamentally strong company will go high with time. However, if the prices go too high compared to your entry price in a very short time period, you should sell the stock and book profit.
3. When you find a better stock: If you find a company whose fundamentals are better than your current stock and is giving better performance consistently, then it can be the right time to exit a stock. In such scenario, you should sell the previous stock and grab the better opportunity.
4. When you need the money: The reason why you are entering the stock market is to make money. And when you really need that money, you should sell your stocks and exit. (Btw, do not sell the stocks just to keep the money in your saving account.) Sell the stocks when you actually need the money like paying for a new house, new car, and your kid’s tuition fee etc. There cannot be a better time to exit a stock than when you need the money most.
These are the only four scenarios when you should sell your stocks and exit. In all the other scenarios, the holding period of a good stock should be long-term. Do not mind the minor short-term fluctuations. Invest in good stocks for long term and enjoy the ride.
That’s all for this post on what is the Right Time to Exit a Stock. I hope this post was helpful to the readers. Do comment below what is your stock exit strategy. Have a great day and happy investing.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting