Parameters to look at before exiting from any stock

When to sell? What are the parameters to look at before selling a stock? These are the questions that Sujan Rao, working in an Indian
company, asked after seeing a sharp rise in the equity markets. With over 90% appreciation in the Sensex since March this year, a large segment of the investor community is in a fix on whether to sell or hold.

While the views are divided as far as the direction of the market is concerned, SundayET has some insights on the parameters to look at before exiting from any stock.

SundayET has been telling its reader that they should have a return estimation before buying any stock and hence the best time to exit is when your target is achieved. However, if one expects further upside due to any development, it makes sense to go for partial profit booking.

Also, according to Anil Chopra, group CEO, Bajaj Capital, if the target return fixed for a particular stock has been achieved one should exit. For example, if you have invested in a stock at Rs 100 per share with a target return of 20% in one year and in case stock appreciates to Rs 120 in two months then it is wise to exit that stock and book profit.


Since it is difficult to buy stocks at the bottom, experts suggest opting for systematic investment plan (SIP), where investors make periodic investments rather than putting a lump sum amount. Similarly, it is impractical to sell at the top and hence one should go for systematic selling plan (SSP) and at every level of the upward rally investors should book some profit.

However, it is not advisable for investors to decide on selling triggers right at the beginning.
Valuation of the company is another parameter to look at for deciding whether to hold or sell the stock. Although, it may be possible that a stock goes up further even after reaching the fair valuation, experts suggest that investors should sell once the stock price goes beyond the fair value.

Also, one has to look at the options available. If you find any other investment option more attractive compared to your current investment in a particular stock, you may consider switching. The market trend, which is mostly driven by sentiments, is crucial. According to Kapur, frontline stocks are usually less volatile than mid caps. They may offer less return than mid caps but have a relatively higher safety level.

Mid caps generally do well only in very firm and positive markets. Some of the large cap stocks like realty majors also have a high beta and are very volatile. The moment the sentiment in the market changes or uncertainty starts creeping in, it is better to exit all mid-cap and high beta stocks regardless of whether the target one has in mind while investing has been achieved or not.


In addition, according to Vineeta Jain, head research & index management at Eastwind Capital Advisors, when one notices that insiders are
BSE
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Key to maximising returns
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selling stocks substantially, it is better to exit from that stock. Also, one should exit from companies which do not react positively to good news coming in or do not fetch higher valuation even after showing impressive quarterly results.

When it comes to investors of mutual funds, parameters to take a sell call may differ a bit. Investors need to evaluate the performance of the invested schemes on a regular basis. The moment there is any major discrepancy from the benchmark indices and peers, one can consider an exit.

The performance of a mutual fund is dependent on the capability of the management team. Hence, any change in the ownership or fund management team may impact the fund performance. It is advisable to avoid schemes where the management team has been changed recently even if the schemes of that company were performing well because the past performance and track record is no longer relevant.

Mutual funds are managed by fund managers and logically a buy or sell call should be taken only by them, however, partial profit booking may be done in case of extraordinary returns even if the scheme is doing much better than peers and the benchmark. This is just to be cautious and safe as usually very high performing schemes in bull markets take a lot of risk and suffer in a big way when the market sentiment reverses.

Unit-linked insurance policies (ULIPs) are for long-term products, but with the sharp rise in the stock market, the net asset value of ULIPs also goes up. And as part of balancing the portfolio one may consider a switch to conservative portfolio, whereby a part of the equity exposure is shifted towards debt instruments.

Given the current market condition, Kapur says, "It makes a lot of sense to switch to a conservative portfolio and reduce your equity exposure. Insurance anyway is a conservative investment option where safety scores over return."

Glossary :

Technical Analysis: A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts to identify patterns that can suggest future activity. Technical analysts believe that the historical performance of stocks and markets are indications of future performance.

Trend: The general direction of the price of an asset or market. Trends can be thought of in varying lengths including short, intermediate and long term. If one can identify a trend, it can be highly profitable as you will be able to trade with the trend. It is best as a general strategy to trade with trends, meaning if the general trend of the market is headed up be very cautious towards taking any positions that rely on the trend going in the opposite direction.

Trend has three directions:

1. Uptrend: When each successive peak and trough is higher than the previous one, prices are assumed to be in an uptrend. It is so named because the direction of prices is upward. Buying strength is the trading strategy to follow in such kind of a market.

2. Downtrend: When each successive peak and trough is lower than the previous one, prices are assumed to be in a downtrend. It is so named because the direction of prices is downward. Selling weakness is the trading strategy to follow in such kind of a market.

3. Sideways market: When prices are stuck in a range-they are neither going up or down in any significant manner-the market is said to be in a sideways trend or rather it is trendless. Buying weakness and selling strength should be the trading strategy to follow in a sideways range-bound market.

Trend has three classifications:

1. Minor or Short-term Trend: The trend that lasts from five days to about three weeks are known as the short term or minor trend.

2. Intermediate or Medium term Trend: The trend that lasts for more than three weeks to six months may be called an intermediate trend. Medium term trend is somewhat synonymous to intermediate trend but is generally used to describe price trends that last between two months to six months.

3. Long term Trend: Any trend that continues for more than six months to several years is categorized as a long term trend.

Accumulation: It is a phase in price activity where the range in which prices move around is relatively small and volume is comparatively small, and the final breakout is on the upside. This accumulation phase is generally found after a sustained downtrend and is normally found around the bottom.

Distribution: It is a phase in price activity where the range in which prices move around is relatively small and volume is comparatively small than the preceding phase when prices were rising, and the final breakout from the range happens on the downside. This phase is generally found after a sustained uptrend and is normally found around the top.

Consolidation: After a sustained swing in prices, market tends to take a breather and prices tend to oscillate within a range before resuming the original trend. This intervening phase is known as consolidation.

Support: The level of prices where demand for the asset or security overpowers supply. It is the level from which prices tend to bounce back upward or arrest its downward movement.

Resistance: The level of prices where supply for the asset or security overpowers demand. It is the level from which prices tend to reverse course and move down again or halt.

Volume: Number of security or assets-in equity markets shares, in futures markets contracts-traded within a given period of time. In market statistics published in newspapers, it is generally the number of securities or contracts traded during the day in question.

Open: This relates to the price of the first trade done for any security during the day or any given time period.

High: This relates to the highest price reached during the day or the time period in question.

Low: This relates to the lowest price reached during the day or the time period in question.

Close: This normally refers to the last traded price for the security during the trading day or any given time period. However, some exchanges like the National Stock Exchange (NSE) take a weighted average of the last half an hour's price activity.

Stop loss: Stop loss is an essential risk control mechanism. One should always keep it in mind while initiating a trade. Stop losses are generally given so that there is a level below /above which the market will tell us that the call has gone wrong. It would always be there.