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Most new retail investors join the party late – after a bull market has already been in progress for some time. New highs are hit on a regular basis by market indices and individual stocks. Investors feel excited that the shares they have bought at already high prices are moving even higher.
But stock markets don’t move in only one direction. Corrections in bull markets are common and happen often. Some times these corrections are small – between 3-5% – but once in a while, a 15-20% correction from the top causes panic when some stocks lose more than 30-40% from their tops.
In this month’s guest post, Nishit argues in favour of partial profit booking on a regular basis to turn notional profits into real cash that can be redeployed on corrections or enjoyed as spending money.
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Often the main questions of small investors are when to buy shares and when to book profits. The stock markets are driven by 2 factors - Fear and Greed. Fear grips when markets are falling and that is what prevents investors from buying shares at mouth watering prices. Those who bought shares in August 2013 have seen share prices of very good companies double or treble.
The second emotion which drives investors is Greed. If Aug’13 was driven by Fear we have September’14 driven by greed. When does one book profits? The markets may go up further. We may miss profits if we sell now. Then, one day a crash may come and wash away the entire amount.
So what does the retail investor do in all this?
For every investment, there has to be a price fixed where profit has to be booked. Without booking profits, they remain notional profits. At the same time, there are several investors I know who have been holding a ITC shares since the 1970s and they have become worth crores after splits and bonuses.
Suppose I have bought 200 shares of a company X giving a dividend of Rs 1 at Rs 100. I book partial profits after the shares reach a price of Rs 150 where I get rid of say 30% of my shares.
My original investment was Rs 20000. I have booked profits worth Rs 9000. My cost price for remaining 140 shares becomes Rs 11000 - which is about Rs 78.50 per share. Re 1 dividend on Rs 78.50 gives me a dividend yield of about 1.3%. Over a period of time the company is expected to do well and the dividend amount will increase. At some point, I will get a tax free dividend yield of 5-6% - which means my residual shares have become almost like a bank FD.
Also, if I follow the markets closely I can do a bit of trading in the shares of the same company.
From the freed-up capital, I am able to make fresh purchases, or enjoy the fruits of my investments (if we do not enjoy the fruits then why invest?)
There a few riders to this strategy. The company has to be a very good company like an Axis Bank or Yes Bank or a Voltas.
Business scenarios change and the company’s products or services may become obsolete - so one must be ruthless about dumping the company if it is no longer doing well.
Hence, please book profits regularly, and enjoy the fruits of your hard work.
It is a good time between now and Diwali to take some money off the table if the market continues to rise.
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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.
Nishit blogs at Money Manthan . You can reach him at nish.stockid@gmail.com )
Posted in: Indian Market
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