loader2
Partner With Us

How to decide the right time to exit a stock?

Introduction:

Knowing which stock to hold and what strategies to follow succeeds the need to acknowledge the right time to sell a stock. Not getting carried away with the sentiments towards a stock and deciding based on technicalities and figures is essential. That necessitates one to carefully select both, the point of buying and selling a stock. One must correctly execute both of these decisions to make a profit.

To figure this out correctly, let us first start by knowing some basic concepts about stocks.

1. What are stocks?

A stock (also called equity) is a financial instrument that reflects ownership of a portion of a company. "Shares" are the units of stock. Investors may buy and sell individual shares of a business on the stock exchanges.

2. How does stock price move?

Before we discuss the price movement in the market, it is essential to understand the terms demand and supply in the context of capital markets

  • The term "supply" refers to the total quantity of shares available for selling at a given price.
  • The term "demand" refers to the total quantity of shares that buyers are willing to buy at a given price.

When the number of sellers (supply) exceeds the number of buyers (demand), the stock price falls. Although the price fluctuates because of demand and supply, the factors that cause a change are numerous. These include positive or negative news about a company, investor's strategy, psychological factors, company earnings, and company financials.

Additional Read: ICICI Direct- Stock market basics

3. When should I buy and hold stock?

When deciding whether or not to buy stocks, it is beneficial to be well-informed, and one way to do so is to learn about the business. Knowing more about the business will help you bring the earnings results into perspective. In doing so, consider learning the price range you are willing to buy in, the stock's valuation, and the possibility of dividends.

4. What is the right time to sell your stock?

Defining a simple market exit strategy deserves just as much consideration as the analysis you do when assessing investing in a business. To make it easier, here are a few red flags that indicate it is probably time to sell stocks.

  1. Changing fundamentals of a company:

    Keep an eye on the company's success from quarter to quarter. If you note a pause in announcing growth figures or if the company has been underperforming for a long time, it's time to pay attention. Scan for at least 3-4 quarters before making a decision. Check to see whether capacity utilization decreases (for manufacturing companies) or whether non-performing assets (for banks and other financial institutions) increase.

    Debt is also a vital predictor of a company's long-term viability. Consider the debt-to-equity ratio. A capital structure ratio compares long-term debt to long-term equity to assess a company's long-term financial viability using balance sheet data. A higher percentage implies that the company is borrowing money for a more significant portion of its funding, putting the company at risk if debt levels are too high. The lower the amount, the more stable a business is. However, if you note that this number has risen and shows no signs of decreasing, it’s time to dig deeper to analyze the other factors.

  2. Corporate governance issues of a company:

    Corporate governance measures a company's ability to maintain stakeholder relationships. As an investor, look for their transparency policy, executive pay policy, dividend plans, and a mechanism for resolving conflicts between internal and external shareholders. If a legal battle hasn't been settled, the company is in regulatory trouble, or senior executives leave abruptly, the negative effect is significant, and the stock price will drop. That should be a crucial consideration in your stock market exit plan. When a company performs poorly in corporate governance, it is challenging to recover. It's time to book profits if it fails to meet the fundamental criteria.

  3. The market behaviour:

    Sometimes the rise and fall in the price is not a result of company fundamentals or technical aspects but is caused due to investor’s sentiments. Indicators will be buoyant if the mood or market attitude is good (optimistic). A lag (pessimism), on the other hand, displays a depressed mood. To some extent, these attitudes might also help you gain a sense of the economy and aid in avoiding investors' behavioural biases.

  4. Use of Technical Analysis

    Technical analysis is also widely used to determine the target price of the stock. There are many indicators like support and resistance, RSI (Relative Strength Index), moving averages, chart patterns, etc. used by investors to plan their exit from a stock position. The study of technical analysis helps you to increase the probability of prediction of a rise or fall in stock prices.

The bottom line is that you're in the stock market to make money, and you shouldn't let your emotions rule your decisions. It's crucial to know whether to hold or sell a stock and while it's difficult to predict, some indicators will help you figure out when it's time to sell. While it's important to stick with a company you've evaluated based on its fundamentals, you should also be cautious and watch out for the red flags listed above.

Disclaimer: ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470.The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. The contents herein mentioned are solely for informational and educational purpose. Investments in securities market are subject to market risks, read all the related documents carefully before investing.

Most Popular

f
  • 15 Sep 2021
  • ICICI Securities

5 Most Popular Reasons for Switching Bank

In the beginning, you would hear from them quite often. But of late, you're noticing more and more signs that it's no longer working. We are referring to your relationship with your bank. Click here to read how to recognize the red flags in your banking relationship and why it might be a good time to end the bond.

  • 15 Sep 2021
  • ICICI Securities

How Intraday Trading Works? Detailed Ideas

Intraday trading in India has been gaining momentum of late. It is no longer the option of only trade pundits.

  • 15 Sep 2021
  • ICICI Securities

What is Intraday trading? A Beginner's Guide

With the advancement of technology and increased knowledge about the stock market, trading is no more a domain dominated by stock pundits.

  • 05 Sep 2021
  • ICICI Securities

Is it Good To Invest in Cyclical Stocks?

Akin to how the pedals of a cycle go up and down as it moves forward, the share price of certain stocks goes up and down in accordance with the economic cycles a country goes through. 

  • 05 Sep 2021
  • ICICI Securities

A primer on Fixed Maturity Plans

If you happen to have some surplus funds which you don’t need for a specific period, but you don’t want to take the risk of investing this money in the stock market, you can very well put this money in a Fixed Maturity Plan or FMP. 

  • 05 Sep 2021
  • ICICI Securities

How to Choose the Best Equity Mutual Fund

You must have heard a lot about investing in mutual funds. But before jumping on this trend you need to assess a mutual fund scheme according to your goals, investment horizon, risk profile, liquidity needs and many other factors to find a suitable match. 

  • 05 Sep 2021
  • ICICI Securities

A Beginner’s Guide to Monetary Policy Tools

The Reserve Bank of India has the incredibly crucial responsibility to formulate the monetary policy. The main objective of monetary policy is to control inflation and provide a conducive environment for the country's economic growth. 

  • 05 Sep 2021
  • ICICI Securities

Buying Penny Stocks and its Risks

There is a specific category of stocks whose prices are very low and they seem to yield exponential returns. But do you know that investment in such stocks could be risky? 

  • 05 Sep 2021
  • ICICI Securities

How to Choose the Best Debt Mutual Fund?

Debt mutual funds primarily invest in fixed income securities, which include money market instruments like commercial papers, corporate bonds, treasury bills, government bonds and other instruments.

  • 05 Sep 2021
  • ICICI Securities

Tax Saving Using Section 80D

“Make your life safe and get insurance immediately”. This statement was never more relevant than the times when the pandemic threatens to wipe off the population. 

Open an Account

Sign Up for Free

+91

Please use the mobile no registered with Aadhaar.

OTP sent to +91 1234567890

Didn’t received OTP? Resend

00:30

iciciDirect-money-logo
iciciDirectMoney-App

Get Research Backed Recommendations.

Download The app now

or Scan below QR Code To download app

QRcode