Tuesday, June 29, 2010

Decision Making in Volatile Market

The stock markets have gone up significantly over the last few quarters. The markets have been volatile during this run-up phase and had a couple of profit booking correction phases. Profit booking (or exit) is a very sensitive factor and the decision to book profits is personal to an investor. Many investors are sentimental about their investments and therefore miss an opportunity to book profits (or cut loss) at the appropriate time.

These are some strategies for investors to book profits and avoid missing out on opportunities: Set target and phase exit Booking profits at regular stages is one of the most basic strategies. Wealth managers suggest maintaining a 'book profits' and 'cut loss' target on investments and keeping track of them. However, many investors do not follow it or lose track of the targets.

It is therefore advisable to keep booking profits regularly, whenever the price moves significantly. Smaller milestones can be set in steps of 10 to 20 percent price movements.

Regular selling and booking profits enables investors to average out the opportunities and use them in a systematic manner.

Identify sell signals:

Identifying sell signals is a bit more difficult. This takes time and investors need to keep tracking developments around their sectors and markets in general.

These are some of the basic but important factors that investors can track to identify signals for profit booking: Quarterly results Investors can track the quarterly results of companies.

Sometimes, the results clearly indicate the business conditions and challenges, which indicate a clear-cut sell signal. At other times, investors should research deeper to figure out a way forward from the management interviews, analysts' views, etc.

Market trends:

The market is divided into various sectors. These sectors have well-defined trends based on past data. The general performances of stocks from various sectors vary according to the market conditions.

For example, FMCG and pharma are treated as defensive sectors. These stocks perform well in negative market conditions whereas they under-perform during good market conditions.

Similarly, there are different tendencies for different sectors, and investors can take a decision based on the general market and sectoral conditions.

Sharp run-up:

If a stock runs up significantly in the short term, it can be treated as a signal for profit booking. Most of the time, investors do not book profits (or exit) due to their sentimental attachment to a stock and lose an opportunity.

In case an investor can't make an exit decision, he should look at opportunities to book part profits at least. This helps in making best use of an opportunity.

Be objective:

Investors should be careful while investing in equity-related instruments, especially if they are investing in stocks themselves. It is important to put emotions and sentiments out of the way while taking decisions (especially exit decisions) related to investments.

Sometimes, in case of bad investments, the investor should be ready to take a cut and make a loss exit. This hard move enables him to protect the capital which can be reinvested in stocks or instruments with better prospects of growth, rather than losing the entire capital in a bad investment.


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