How do you know when to sell a stock?

Selling is rather difficult than buying a stock.Do you know why?

Mostly, people buy a stock without any concrete reason surrounding it(which is not the proper way) and as a surprise, the first timers many a times gain from it as the stock price moves up. But a repeated question that hammers the minds of a million buyers is when to sell the stock.

A lot of times, people sell the stock and it moves up further. They become disappointed that there could have been a chance of gaining more profit. But this happens with everyone. The first and foremost thing one should remember and keep in mind is:- Noone in this world can predict the exact top and bottom price of the stock. If you are able to do it, then its a fluke. Try it the next time and you will fail. So, its a futile effort figuring out the exact top.Predicting consistently the exact top and bottom a stock price will move is just impossible and this is not just a speculation but has a concrete reason surrounding it. I would not like go into details but you can message me for that reason if you want to know. So, one should never regret if he sold his stocks at a certain price and it went up after that. This is the first step.

Selling a stock may become a knotty problem for you if your purchasing reason was just a guess. It can further crescend and a state of panicky may be caused as the price fluctuates with passing of time.

So Try to avoid these misconceptions before buying a stock:-

Misconception 1:- Stocks that are in 52-weeks high should not be bought.

This is a widespread myth and a lot of people blindly follow it. Its not necessary that a stock that's in its 52 weeks high today doesn't have the potential to go up.

In 2013, La Opala RG was trading at its lifetime high range i.e. rs52 (split adjusted price) and continued its course of making lifetime highs till the next 2 years. In 18 months, the stock appreciated by 480% and by Sept 2014, the stock was quoting at 310.

There are a lot of such examples proving this conception wrong.

Misconception 2:- Stocks that are near 52- weeks low range have a greater potential to move up.

This widespread misconception has caused disasters. Few even consider these stocks ‘undervalued' which is absolutely wrong. A sharp crash in the stock price doesn't ensure a sharp run up.

For example:- Educom from 2006–2008 generated around 10 times return. Around mis-2009, the stock reached rs1000. Within next one year, the stock dropped at 500 levels. After such a drop, many investors took positions, hoping that it will regain its past glory. For the next 4 years, the stock created fresh lifetime lows almost on a monthly basis. By sept 2014, the stock was available at rs30. From 1000 to 30. What a crash.

So, a wrong buying decision may also drastically affect a selling decision.

So, now comes when to sell a stock….

• Develop a pre-defined exit strategy while investing in stocks. This strategy is a must for every investor. If the reason of purchase is clear, don't hesitate to buy a stock. Suppose you bought a stock because of its 30%+ growth rate, then you should sell whenever the rate slows down. Don't purchase the same stock again if its rate goes down and declare it as a ‘value buy'. Similarly, if you purchase a stock based on rupee depreciation, then you can sell the stock whenever the cycle reverses. It doesn't matter whether you are in a profit or loss.
• Never get emotionally attached to a stock. If you think it has moved down a lot and has no potential to move up but still, just because you find this stock the best, don't hold it or buy back again.
• Don't repent after selling. “Stock price appreciated 50% after my exit”— This a well- known confession of a lot of investors. Just remember one thing:- you can never find out the exact top. Then why repent? You are already in profit. Stock market is like a game of cricket. Sachin Tendulkar is termed as the ‘God of Cricket’ but is it possible that he never gets out? Has he mastered cricket so much that he cannot get out? Its just not possible. He even goes for a duck. Similarly, in the market, no one can become perfect. Its not possible that you'll never lose money in the markets. Losses are a part of the game. Your aim should be to maximize profit and minimize loss and not just gain profit. Even if you earn 7/10 times in the market, I would consider you as a successful trader/investor.

Note:- Examples taken from a book by Prasenjit Paul.

BY ABHIRAM DAPKE