Know about When Should you exit a Stock? | Espresso


When should you exit a stock?

March 21, 2022
When should you exit a stock?

One of the key decisions an investor has to make while investing in any stock is the duration for which they want to hold it. If you are buying a stock to fund a car, you will want to hold it till the time you make the payment for that car.

However, setting the time horizon becomes difficult when you are not investing to meet a future financial obligation. This is especially true for long-term investors. How long is long enough?

You may have heard long-term investing unleashes this beast called compounding.

While it is generally true that given enough time compounding irons out the day to day rumblings in the market, there is a caveat. Market dynamics are not constant. The constant fluctuations make it imperative to constantly reevaluate your investments. Then there are changes in technology, consumption patterns that could make a market leader obsolete in no time.

For example, Blockbuster, once America's leading video rental chain, was pushed out of business in a matter of years by the rise of the over-the-top or OTT companies like Netflix. In this case, staying invested in Blockbuster, hoping for compounding to save the day, would have been ill-advised.

So when should you sell a stock? Let us walk you through it

Weakening fundamentals:

A stock’s fundamentals are those underlying qualities that contribute to its worth as a business. For businesses, information such as profitability, revenue, assets, liabilities, and growth potential are considered fundamentals. Through the use of fundamental analysis, investors calculate a company's financial ratios to determine the feasibility of the investment.

Investors should not only compare the fundamentals of the stock with other companies in its peer group but also compare it with its own performance in the past. They should also have an understanding of the company’s business cycle.

Weakening fundamentals include diminishing revenue (year-on-year or quarter-on-quarter), no value-adding innovation, indecisive management, competitors performing better, etc.

A better stock in sight:

Investors who hold on to their stocks do so because they believe in the company’s value. However, if any of the above-listed fundamentals begin to get compromised, investors must spot the glaring red beacon.

If a competing organisation keeps outperforming in the same market conditions, it may be time to switch to that stock because it means that the second company’s offerings are much better, or at least the market views it that way.

Rapid overvaluation:

In finance, mean reversion, or reversion to the mean, is a theory that suggests that asset price volatility and historical returns eventually will revert to the long-run mean or average level.Hence, if the stock price continues to outperform its fundamentals, keeping all things constant, it may be time for you to book profits and look for other opportunities in the market.

Personal financial crisis:

Investors enter equity markets with a vision of growing their wealth over time. But sometimes in life, you may find yourself in a tight spot financially. If the extra money can pull you out of this crunch, cash out of your portfolio and liquidate.

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Please refer the Risk Disclosure Document issued by SEBI and go through the Rights and Obligations and Do’s and Dont’s issued by Stock Exchanges and Depositories before trading on the Stock Exchanges. Brokerage will not exceed the Exchange prescribed limit.

R. Kalyanaraman
by R. Kalyanaraman

Chief Executive Officer

I am a sales guy at heart with utmost willingness to listen to people – customers, employees, competitors et al. Nothing gets me a bigger adrenaline rush than an interesting conversation with my customer!