Partner With Us NRI

Open Free Demat Account Online with ICICIDIRECT

How to decide the right time to exit a stock?


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

  • 13 May 2022
  • ICICI Securities

The Five-Point Financial Planning Checklist For Your Family

Whether you just got married or planning to have a baby or have dependents, you should have financial plans for every stage in your life to ensure a secured future for your family members. Here are five things you can do financially for your family.   

  • 12 May 2022
  • ICICI Securities

What is a Zero Coupon Bond?

You get fixed returns in the form of interest until maturity when you invest in a bond. Zero-coupon bonds work a little differently. In this article, find out what zero-coupon bonds are, their advantages and whether you should invest in them. 

  • 12 May 2022
  • ICICI Securities

What are Cross Currency Pairs?

The forex market is the largest financial market globally. Currency trading is a lucrative and booming business. While most currencies trading happens in relation to the US Dollar, some don’t. That forms the basis of cross currency pairs. Here’s what you need to know about it. 

  • 12 May 2022
  • ICICI Securities

Investing principles from Benjamin Graham: The Father of Value Investing

Benjamin Graham was a British born economist, professor, and investor who taught at Columbia University. He was also a mentor to some of the most famous investors of the 20th century, including Irving Khan, John Templeton, & Warren Buffett. Buffett called him "the second most influential figure in his life, only after my father". 

  • 12 May 2022
  • ICICI Securities

How to Invest in Nifty 50?

The Nifty 50 is the benchmark index of the National Stock Exchange. It represents the 50 largest companies listed in India. Investing in the Nifty 50 can be a good idea for those looking to make index-linked returns. Here’s how you can invest in the index. 

  • 12 May 2022
  • ICICI Securities

Investment philosophy of Cathie Wood: The most powerful woman on Wall Street

Catherine Duddy Wood, also called Cathie Wood, is an investor who primarily invests in disruptive technologies and is the founder, chief executive officer, and chief investment officer of ARK Investment Management, LLC, an investment management firm mostly active in the United States.

  • 11 May 2022
  • ICICI Securities

How to Use Technology to Improve Your Finances

Technology has made life simpler for everyone. In the realm of personal finance, technology has streamlined many processes—from budgeting to automating your payments. On National Technology Day, let’s look at how technology has transformed our finances. 

  • 11 May 2022
  • ICICI Securities

How to Invest in your Every Goal with Mutual Funds?

Each of us is unique. We have different needs and goals in life. Some of us can ride along swinging markets, while some may need a relatively conservative investment tool. 

  • 11 May 2022
  • ICICI Securities

Four Reasons Why Entrepreneurs should Invest in Equity Mutual Funds

Equity mutual funds provide growth opportunities not just for individual investors but also for entrepreneurs and corporates. They make excellent investments for anyone looking for wealth creation. This article will give you four reasons why businesspeople should consider investing in equity mutual funds.