Risks are a big part of the financial market. Whether you are a small investor learning what are shares and types of shares or a big corporation, risks exist in varying degrees for all. The higher the reward, the bigger the risk. If there is potential for you to earn exponentially, there is also potential for big losses. These risks can be managed to a certain extent; however, plenty of times, the best thing to do is exit the market. The most important aspect of exiting a stock is the timing. A smart investor must know when to exit the market. The point of exit must be timed in order to maximise profits or minimise loss.
In this article, we will be focusing on the tips to help you learn when to exit a stock. First, let us begin by taking a couple of examples of what might happen to you in the financial market.
Case A
In this example, assume that you have chosen to invest in a stock of company ‘N’. Suppose you buy this stock in 2023. At that point in time, you believe that it will go up after a prolonged downtrend. However, the stock breaks the support level and tumbles further down. After holding it for a year in 2024, you choose to exit as the stock recently made a new low. However, only four months after your exit, the stock sees a price reversal and a new uptrend, which takes it to new highs and even breaks the previous resistance levels.
Now think about when to exit a stock. Did the investor here make the right call to exit the market? Clearly not. If they waited for a little more time, the stock could have minimised their loss or even made a profit.
Case B
Now, in the second case, you invested in the stock of company ‘M’. Buying this stock in 2023, your goal is to sell it off as long as you can make a profit. However, within a short time, the market prices fluctuate, and the stock price takes a sharp fall. But, despite the negative market sentiment, you believe in the company’s financials and choose to hold onto it. For this, you secure a loan against the mutual fund and stay liquid even though you need the money. Your patience pays off, and within three months, the stock prices rise again to give you a significant profit.
Now, the right call here was to wait for the right timing of a market exit, and it paid off.
These examples highlight the critical importance of exiting the market at the right time. If done right, this could be the difference between a smart and a novice investor.
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When to exit a stock
To better acquaint investors with the conditions of when to exit a stock, we have compiled the major factors of consideration below:
Degrading fundamentals
Businesses are dynamic, and their financials and fundamentals can change over time. If your research suggests that the fundamentals of the company you have invested in are declining, it is a good answer to our main question, “When to exit a stock?”. Degrading fundamentals typically are a sign of complacency and directly impact a company’s revenues and profits over time.
A better alternative
If you are wondering when to exit a stock, the answer can be as simple as when you find a better alternative. Unless you have any emotional ties to a stock, there is no point in holding onto a bad bet when there is a better option available. If a company has better fundamentals than the stock you are holding, you can seriously consider selling your position and re-investing.
Overvalued stock
If the stock of a company you are holding has been overvalued in a very short period, it may be an indication to exit the market. Understandably, when thinking about when to exit a stock, the general thought does not go towards exiting when the stock prices are rising. However, when the price rise occurs rapidly and significantly, it may be short-lived and due for a reversal. Thus, it is important to know when to book your profit and when to exit a stock.
Sell for profits
The basic drive for investing stems from a desire to increase your wealth. You are in the market for profits. Thus, if you are in a profitable position and need the funds or want to book your profits, you can confidently exit the stock without worrying about the right time when to exit a stock. Making a profit trumps following trends, and you should exit when you want to.
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Conclusion
Knowing when to exit a stock at the right time is crucial for maximising profits and minimising losses. Whether fundamentals degrade, better opportunities arise, the stock becomes overvalued, or you achieve desired profits, timing your exit based on these factors differentiates a smart investor from a beginner. Ultimately, the decision to sell should align with your financial goals and investment strategy, ensuring you make informed and strategic choices in a dynamic financial market.
