This is advice traders and investors in the stock markets hear often. Book Profits Immediately. Many people reply I am a long term investor. I won’t book Profits Now. It’s important to be a long term investor, but more important to have a long-term investment strategy.
Profit Booking also called profit taking is when you liquidate holdings to cash out the profits you have created. This is crucial if you want to profit from your stock market investments.
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See Also: Basics of Financial Planning
One of the main reasons to book profits in the stock markets at regular intervals is that stock markets are volatile. You can take advantage of volatility to book profits.
Let’s have an example on how volatility helps you make profits in the stock markets. You have bought 10 shares of Kotak Mahindra Bank Ltd at an average price of Rs 1,570 on November 21st, 2019. You sold these shares on December 18th at an average price of Rs 1,720, thereby booking a profit of Rs 150 a share. You re-entered on 8th January 2020 at Rs 1,650 a share. If you consider yourself to be a long-term investor and don’t book profits, you have lost an opportunity to make (1,720 – 1,650) or Rs 70 a share. You need to have the confidence that Kotak Mahindra Bank will regain the 1,720 levels and proceed even higher. This is a long-term strategy.
See Also: Types Of Investment Plans
Emotions are a big reason why you lose money in the stock markets. Over time you fall in love with stocks and are just reluctant to sell them. This can be a huge mistake.
Separate emotions when it comes to stocks. Be prepared to sell them if you feel it’s the right time and you have made profits.
Let’s say you have 200 shares of Company ABC bought at a price of Rs 100. The current market price of the shares is Rs 140. You decide to sell the shares at Rs 140. After selling the shares at Rs 140, you have actually realized a profit of Rs 40. This is a profit-booking in stocks.
What if the prices of the stocks you hold decreases? Let’s say you sell 200 shares of Company ABC at the price of Rs 100. Then after some days, the share prices plunge to Rs 60. If you purchase the same shares at Rs 60, you have made a profit of Rs 40.
For a trader, the primary task is the risk-return trade-off. Let’s say you had bought HDFC AMC shares at Rs 1,500 last year. You had set a target of Rs 1,800 on HDFC AMC shares. Once the share hits the target you must sell. It doesn’t matter if HDFC AMC shares go to Rs 2,000 or beyond. Your job is done. Just as you maintain discipline with the stop loss, you must maintain discipline in profit booking.
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