It was just about 5 months back when I finally decided to sell off my holding on one of the great stocks that gave me an overall return of 15%. However, the company had come up with some excellent investment prospects, which caused its share prices to keep rising, keeping me in a dilemma. Then the worst happened. Some serious allegations regarding the company management came to the limelight, and the stock prices crashed. Who could predict such a sudden downfall? Is it really possible to invest and book profits when the market is so full of uncertainty?
Yes, it is definitely possible. Before we understand how to handle profitable shares, it is important to note that such profit booking strategies are applicable only to investments meant for the short to medium term, which may aim for a few months to a year or two.
- Use return on a risk-free investment as a benchmark - Investment in fixed deposits is a very common step that we take in order to avoid any unnecessary risk and to ensure that we get a particular return within a fixed time span, without any fluctuation, even though it is very little. Thus, you can use this interest as a benchmark for calculating profit from stock and decide what the satisfactory and acceptable rate of return should be for you. Let us assume it to be just the double. Therefore, if your current stock investment has already given you the required return, which is double the benchmark risk-free investment, you may decide to book your profits.
- Rebalance your portfolio and book profits - This means if your portfolio has 30% equity (high risk) and 70% debt(very low risk), and a few years down the line, you notice that the equity has given return enough to turn the portfolio into a 50-50 situation, you should decide to book your profits from the equity and bring back the portfolio to the original 30-70 position. This will ensure that even if there is a sudden crash in the equity portion, your portfolio will lose only the original 30% return on equity, not the entire 50%.
- Exit with profits in advance - Have you ever experienced a situation where your target profits have already been achieved, but you are still waiting to earn more just because the stock prices are rising? This clearly shows greed and a lack of control over emotions. If this happens when you are very near the event for which you invested all the money and then suddenly there is a market crash, all your financial planning goes for a toss. Thus, here, the lesson we learn is to calculate profit from stock and book profits much before your financial requirement timeline is about to end and invest the money earned in a risk-free instrument to get a steady return. This will ensure that the goal is met with perfect planning.
- Decision-based on technical charts - Many technical indicators give us a very clear idea about what our target price should be to book profits and when we should exit the market after booking losses. Here, patterns like cup-and-handle or rounding bottom can help us understand the process. Let us understand it using the chart below, where there is a clear cup and handle pattern. The length of the vertical line marking the distance between the neckline and the bottommost point of the cup will mark the price up so that the stock can rise from the neckline upwards. The uppermost point will be the profit-booking target price. We can use such indicators to calculate stock profits and make exit decisions if the target price gives us our desired return. However, it is not necessary that the above will always happen. So be ready to book losses, too, in case the prices fall below the bottom point of the handle.
Thus, the above are some simple ways to understand when to calculate stock profits, book your profits, and exit with your returns in your pocket. However, this can only happen if you think rationally, are backed by a proper understanding of the financial market and the instruments where you have invested, and have control over your emotions.
Have any more techniques? Comment and let me know.
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