Stock Exit Strategy: What is the Right Time to Exit a Stock?

By Trader Pit

July 7, 2021


One of the biggest challenges in trading is knowing which stocks to sell (or hold) at the right time. Stock analysis can be time-consuming and confusing. Learning how to develop your own exit strategy will improve your trading results.

So, you are about to exit a stock, what is the right time to exit? I know what you thinking, why do I need to exit a stock? Well, I have been in the financial markets for over 12 years, and have been around a lot of trading platforms and trading tools. I have been around a lot of trading ideas, during the course of my career, and I can safely say that the majority of the trading ideas I have seen are really bad.

One of the most important questions that even experienced investors cannot answer is: When is the right time to get out of stock? When should you sell the shares and make a profit? Or what should an exit strategy look like for investors? Knowing the answer to this question is essential if you want a successful career in the stock market.

Do you remember the story of the brave Abhimanyu in the Mahabharata? He was a great warrior, son of Gandhivdhari Arjuna and disciple of the almighty Krishna. Although he was one of the best warriors in legendary history, he only met his end because he knew how to enter the Chakravyuha, but not how to leave it.

The stock market is also a chakra and you need to know how to get in and out. A strategy to sell the stock is just as important as an entry strategy. In this post, we discuss an exit strategy for the conservative investor. Stay with me for the next 5-6 minutes for the right time to get out of the stocks for maximum profit.

When to exit a stock – stock exit strategy

When is it the wrong time to get out of a stock?

Before we discuss exit strategies for stocks, we need to understand when it doesn’t make sense to sell. That is, when is the wrong time to get out of the action.

Imagine the scenario. Today, you bought 20 shares of the company at a price of Rs 500. Let’s assume you’ve done some basic research and the action is fundamentally very strong. The following week, the share price rose to Rs 550 (+10%). What are you going to do? Are you going to sell the shares and get out of the game?

Now, let’s fast-forward two days. The share price has now risen to Rs 590 (+18%). What’s your next move?

When prices rise like this, greed and fear drive your actions. At this point, you may think you’re breaking even. They have already received Rs 90 per share (+18%). What happens when stock prices fall? It is best to lock in your winnings now. But you’re missing a few points. Let me pick them out:

You’ve spent a lot of time analyzing this company, you’ve done extensive research on the stock, and this stock has the potential to make a big profit. He could become a multi-bagger in the future. Why would you want to lock in a +18% profit when you can make a +100% profit or more?

You may also think that you will get in on the action if the price is low. What if the stock price never goes down? What I mean is that the company is fundamentally strong and can produce brilliant results in the future. Chances are you will never get into the stock at a comparable purchase price. Why jump off a moving train and try to catch up?

In any case, let’s imagine a scenario where you have acquired shares. Don’t you think you should then forgo additional brokerage fees and other expenses (including time spent reinvesting)? This means that you have to pay all costs twice when you buy and sell the shares. And the next two times you go back and sell in the future. Double the total switching capacity. Do you really think it’s worth paying that much to a broker to get +18% profit?

Finally, did you know that you have to pay a +15% tax on short-term capital gains? For long-term investments (more than one year), the capital gains tax is lower at 10%.

In general, it makes no sense to sell a stock when it is fundamentally strong just to make a small short-term profit. Look at the big picture. Have you ever wondered why great investors like Warren Buffett, Rakesh Jhunjhunwala, RK Damani and others always invest for the long term? How can you make multiple profits if you never give your stocks a chance to grow?

I will explain this concept in more detail using a personal example.

I am heavily invested in stocks and bought TITAN shares at Rs 314 per share in November 2016. I liked the titanium products. The company is basically very strong and the shares were sold at a discount at the time due to demonetization.

The 5th. In June 2017, Titan’s share price rose 18% in a single day. There is positive news on the GST, which provides for a tax cut in the jewellery sector. The news was greeted with enthusiasm by the people and the share price reached Rs 561 that day.

titan screenshot- when to exit a stock lesson

In any case, I did not sell my shares that day. You can argue that I should have taken a profit (+70% of the entry price within 6 months). But from my point of view, it wasn’t the right time to sell.

There are several reasons why I didn’t sell my shares then. First, the sudden rise in prices was the result of good news. However, the fundamentals of the company have not changed. The company will continue to develop satisfactorily in the future.

Secondly, I may never be able to buy shares again at such a good price as during the demonetisation period.

Third: I didn’t really need the money at the time. If I were to sell my shares, I would have to start looking for the best shares to invest in again, which would take a lot of time and energy.

And it looks like my decision was the right one. The stock has adjusted its price this year. In the longer term, however, the share price has continued to rise. From May 2021, Titan shares will trade at Rs 1,451 per share. The return on my investment is over 4.6 times.

Furthermore, it can be said that the case described above is a typical situation. Did I not explain the right time to get out of stocks? Here are four times when you should really sell a stock.

When is the right time to stop the action?

Here are some scenarios to know when to sell your shares:

1. If stock fundamentals deteriorate: Sell the stock if the fundamentals of the company are not the same as when you bought it. If a company’s fundamentals consistently deteriorate from quarter to quarter or year to year, for example. B. sales/profit are steadily declining, the company has no innovative products, management is not making the right decisions, competitors are doing much better, so maybe it’s time to sell that stock.

For example, if the non-performing assets (NPAs) of banking companies begin to rise sharply from when you initially bought the shares, prepare to exit those stocks.

2. When a company becomes extremely overvalued in a short period of time: Generally, the stock price of a fundamentally strong company will rise over time. However, if the price rises too much in a very short time compared to your entry price, you should sell the stock and lock in your profits.

3. If you find a better opportunity: If you find a company whose fundamentals are better than your current stock and that consistently performs better, it may be a good time to get out. In such a scenario, you should sell the previous stock and grab a better opportunity.

4. If you need money: If you go into the stock market, it’s to make money. And if you really need the money, you should sell your shares and go bankrupt. (By the way, don’t sell stocks just to have money in your savings account). For example, sell shares when you really need the money. B. to pay for a new house, a new car, your children’s education, etc. There is no better time to get out of stocks than when you need the money the most.

Also read: How to choose the stocks to invest in the Indian stock market to get stable returns?

These are the only four scenarios in which you should sell your shares and get out. In all other scenarios, the holding period of a good stock should be a long one. Ignore small short-term fluctuations. Invest in good long-term stocks and enjoy them.

So much for this post about the right time to get out of stock. I hope this article was helpful to the readers. Please provide your exit strategy for this action below. Have a great day and make good investments.

Frequently Asked Questions

What is an exit strategy for stocks?

An exit strategy is a process of exiting a position in a security or market. Means to sell the stock you are holding (for profit).

What is the 3-day rule in stocks?

The 3-day rule in stocks is a rule that says that stocks should not be sold within 3 days of purchase. This applies

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About the author

Trader Pit

A yogi who like Finance and Technology. I have been in Indian Stock market for over 12 years now as financial analyst, portfolio manager, trader. Now, I focus on Yoga, Financial Education & Long term investing. 

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