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Kotak Securities Limited, is a subsidiary of Kotak Mahindra Bank Limited and is the stock broking arm of the Kotak Mahindra Group. With a market shar
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Defining an exit strategy from a stock
By
KotakSecurities
- Manager - Customer Relations (Updated Jun 12, 2008 at 12:12 PM)
Intro:
There is a lot of advice out there for investors who need to learn what to buy and when to buy. You may have the best portfolio among your peers but it is vital to remember that in most cases it is only when you sell your stocks that you will make a profit.
It is always a difficult situation when it comes to selling your stocks. A lot of work goes into buying a stock and whether the stock has served you well in the past or has not been a performer, you still expect it to shine and give you good returns and hence, you hold onto it. However, you need to define a clear cut exit strategy as well. When it comes to equity investing, selling at the right time is equally important. But should you sell or should you wait? What is the correct time to get rid of a stock? It is necessary to answer these questions in an objective manner. Let us examine some reasons which may make it necessary for you to liquidate your holdings in a company:
Markets have turned: Impermanence is the law of the market; a single trend cannot persist forever. When the tables do not turn in your favour, it is time to get cautious. Many investors keep a stop loss target when they purchase a stock. It can be anywhere in the range of 6-8 per cent. If you think the stock has fallen to that level, it may be better to sell it rather than sustain a heavier loss.
The fundamentals have changed: Company specific problems are not that uncommon. It can be that a change in the management has taken the company in a direction that does not find favour with the markets. It could also be that external factors have changed and the company has been affected by it. The investor, to determine the company’s profitability in the future should study inventory levels, company’s debt levels, profitability and performance and if there is a cause for concern in these factors, it may make sense to exit the stock.
The stock affects diversification: Sometimes we get enthusiastic about one company and purchase a lot of it. If you feel that the stock has become too large a part of your portfolio it may be wise to dispose some of it.
The stock has fared badly: Any stock that falls is sure to send shivers down an investor’s spine. If you think that the future does not look bright for the stock and the fall was without any valid reasons, it may be time to consider selling. It is wiser to do a portfolio re-allocation than sitting it out.
The stock has done well: If the stock has fared well it may be time to sell because you should never estimate the health of a company based on the price of a stock. Never hang on to a stock just because it has appreciated on the value front. If the future of the company does not look that bright, sell and cash in the profit.
You can buy something else: Consider selling a loss making stock, taking a tax break on your losses and buying something else. This is what investing is all about, finding better opportunities! If you find something else that offers you a better comfort level in terms of risk tolerance and prospect, grab it.
Competitive advantage: Every major business has a competition, how good is your company’s competitive pricing advantage? Can it manage to extract more money out of its clients? If the company whose stock you hold faces no advantage in economies of scale, has low pricing advantage, little market share and a shrinking customer base its time to bail out.
Study those financials: Numbers are not interesting for most investors but the decision to sell or hold is often hidden in them. Look for increasing scale, control over finances, surplus on balance sheets and a rising profit. If you do not see these positive trends on even some of these pointers, it is time to find safer havens elsewhere.
Conclusion: A lot of people have made a lot of money by buying and keeping stock. However it does not mean that you should stay put on stocks that are going nowhere. The idea behind investing remains the same, i.e., to make a healthy profit. In selling a stock there are several factors at play including personal reasons like need for funds. A selling decision on your stocks should come from the mind rather than the heart, examine carefully what the future holds for the stock and act accordingly.
Note: The above article belong to our fortnightly newsletter - Horizon. To subscribe to Horizon SMS 'Horizon' to 5676788
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