Factors to consider when to 'sell' stocks

Many investors lost money in the equity markets over last one year when they witnessed a steep fall. This triggered a question in the minds of the investors and traders – when should I sell? Though there is no one answer to this question, here are some factors you should consider while taking the ‘sell’ decision.

Objective based profit booking:

Meet Rajan Mahanor, an ardent trader and investor. “I sell when my target returns are achieved. I decide how much I want to make before I commit my money,” says he. This type of investor does not look at potential upside of an investment in the long term, they have strict ‘book profit’ levels attitude. The only downside here is the investor may lose some multi-baggers, if he/ she can't visualize them. The other side of timely profit booking is, limiting the loss.

Stop loss:

Most professional traders enter trades with a clear stop loss in mind. As the position advances in the desired directions and starts achieving targets, the trailing stop losses are introduced. Respecting a stop loss is a good way to avoid greater losses in the market. However these are quantitative methods of deciding the selling point. There are some qualitative aspects that you can also consider to decide if you should sell.


Deterioration in fundamentals:

Smart investors enter an investment due to some solid reasons. Take a simple case…you have entered a stock because the company is run by a set of professionals with established track record. If the set of people on whom you have faith happened to quit, there is a good reason to sell the stock if you think that the management is the biggest factor that influenced your buy decision.

Investors sell their stocks when the macro fundamentals such as interest rates, GDP growth or the micro fundamentals such as product portfolios, management, demand supply situations change in adverse manner.

Valuation:

Some investors are aware of the valuations bands a stock or an index command. At the upper end of the band, they prefer to sell and at the lower end of the band they buy. For Nifty index, there are investors who sold off when it quoted 18 times its trailing 12 months earnings. The same category of investors gathered to buy when the index was quoting around 9 times earnings. This strategy however, must be employed when you have a good track record to rely on. For companies in relatively new sectors where the growth rates are very high, it is difficult to go with this strategy.

Policy changes:

If there is a change in the policy one may come across increased competition as several players enter with better products. Such incidences may warrant a quick sell decision. Also adverse changes in the taxation policy or tariffs on the competition products may lead to a sell decision.

The pool game:

This happens with especially the small investors, as their portfolios comprise few stocks. If one stock delivers super normal returns and outgrows the rest of the portfolio occupying most of the space in your portfolio, it makes more sense to sell the stock and diversify into some other opportunities.