Some investors believe that they have a knack for picking the right stock at the right time. However, many a time, it so happens that a portfolio analysis brings up hits and misses. The misses are often due to the lack of or a poor exit strategy. You might be brilliant at research while picking and entering stocks but fail while exiting the same stock.
There could be two scenarios. One is that you invest in a promising stock. Let us say it does well initially, but within a year starts losing out. Your first instinct would be to exit it before things get worse. You do so, but within a few months, the stock rises much higher, and you lose out on the profits you could have made.
In the second scenario, you invest in a promising stock, and it starts falling the year after. You suddenly face an urgent financial need. However, instead of exiting, you avail a loan against the fund. Later, the stock price rises, and you earn your profits.
To help you put things in perspective, here are the top 4 instances when it would be wise to exit a stock while doing online stock market trading.
1. Degrade in Fundamentals
Often when a company has not innovated or put out enough new things, its fundamentals degrade with time. This usually means that revenue and profits would decline as well. If the fundamentals of your chosen stock are way below what they were when you bought it, it might be a good time to say goodbye to the stock.
2. Finding a Better Stock
Continuing in the same vein as the last point, you could also notice that another company has shown better fundamentals than your chosen investment. This is typically noticed when the company with better fundamentals has been innovating and coming up with better products and services. At such a time, it would be prudent to switch loyalties.
3. Overvaluation in a Short Time
Generally, the share price of a promising company could go higher and higher with time. However, if the price increases a great deal higher than your entry price in a short period, you might want to exit the stock right there.
4. Financial Needs
If you exit a stock for your personal financial needs, you would be doing so because you want to and not because you were pushed to. After all, the real reason for investing in the stock market is to gain from the profit money. Hence, this reason becomes much more sensitive than any other external factor-based reason.
To Sum Up
With more research (which is never enough for an investor), you can grasp these concepts even better to put them into practice. While a company’s ups and downs are always strong reasons for entering and exiting a stock, your wants should assume priority over investing strategy games. Whichever your reason might be, it must be well thought and pondered upon. Eventually, your ultimate goal in the market is to earn.