The main motive for investing or trading in the stock market is to earn some money from this place. And it would be only possible when you book profit in your invested stock from time to time and make your investment or trade a profitable journey.
Profit Booking is the only strategy that can help everyone in the stock market to survive and keep trading otherwise people incurring losses, will exist from this place. Today, we will discuss every aspect of profit booking, from profit booking rules to indicators and best strategy for intraday and long-term investors everything you need to know.
What is Profit Booking in Share Market?
In the stock market world, when you invest your money in stocks, or buy shares of any company with the expectation that it will rise and you can sell at a higher point and book some profits. It is simply the act of selling the security to gain some profits by liquidating your investment in the stock market whether it's in the cash market or derivatives segment.
Why Profit Booking is Important?
Booking the profits to earn money is the only motive in the stock market, but several other factors make profit booking important. Though, making your investment profitable is the main motive but let’s find out what are the other reasons why profit booking is important.
Liquidating the Investment: When the stock market is highly volatile or VIX India is high you should book profit to liquidate your investment and avoid losses. When the market is volatile, stock prices keep moving up and down, it is neither stable nor moves in one direction. Hence, you should book whatever profit you are getting from your trade. And if the stock comes down you can again enter the trade or buy the stock and book profit later.
Reshuffling Your Portfolio: If your portfolio has the stocks trading at a higher price than your investment cost, then you should book profits in such stocks. Rebalancing the portfolio is an important part of investing in the stock market. You can adjust your portfolio by liquidating some money and investing in bullions, fixed deposits and other assets. You can buy stock at lower prices and book profits at higher prices and keep reshuffling your portfolio.
To Control Your Emotions: While investing in stocks many people create an emotional attachment to the stock, and such emotional-based behavior does not allow us to sell the stock, even if it is trading at a higher price. At a higher price, we don't want to sell that and we just want to keep hold of such stocks and want to keep looking that growing further. But this is not the right behavior while investing in the stock market. Here you should book not all, but partial profits and you can use that money to invest in other stocks, or assets like FDs, Gold and real estate etc.
How Much Profit Booking is Important?
Profit booking in the stock market is good behavior to keep earning some money and liquidate your investment for your next venture. But the question arise here, how much profit booking is important or how much profit you should book to keep investment profitable with further opportunity to earn more profits and minimize the notational losses?
Basically during the intraday trading investor book the profits in the whole investment and target the next stock for trading. While on the other hand, long-term investors wait for higher profits and do not book any profits during the first phase of the stock rally. Here, they should book some partial profits to take advantage of stock price movement.
As the stock market movement is a very unpredictable thing, you can’t guess or estimate how much profit you can earn from your investment in a specific time. Even intraday traders and F&O market players keep booking the profits partially book to make their investment profitable. Hence, you should also book partial profits from time to time.
What is Partial Profit Booking?
Partial profit booking is the process of selling some quantity of shares of your investment to earn partial profits and keep the remaining shares in your portfolio if the stock moves further. To make it understand better let's take an example illustrated below.
Suppose you have bought 1000 shares of XYZ Company at Rs 100 each or you are already holding a share of this company at the same price in the same quantity. Now as per the traders' expectations, the stock price moved from Rs 100 to Rs 150 in a week or you can say in a month or maybe in a year.
Here, you can sell 500 shares from your portfolio and book some profits which would be called the partial profit booking. Here, you can take out the cost of your 75% investment. The remaining 500 shares you can hold when the stock moves further or you buy again the same stock if it comes down again around the same levels were bought earlier.
How to Book Profit in Intraday Trading?
In long-term investment, you don't have a deadline or time limit, whenever your stock is trading at a higher price you can book profits either partially or fully depending on your requirement of money. However, in F&O or intraday trading, you have to keep an eye on your stock and book the partial or full profits as soon as it gives you some amount of returns.
Profit Booking in Intraday Trading is possible with the help of technical analysis tools, and techniques like analyzing the candlestick chart patterns, and drawing the technical indicators on charts helps to know where you have to book partial profits or completely exit from the trade.
When to Book Profits in Trading?
Apart from technical indicators for intraday trading for long-term investors, there are certain situations where you should book profits. Apart from technical analysis, fundamental analysis is another factors you should consider to book the profits in trading.
Company-related News: It is called the microeconomic factor, when any company-specific news comes into the market it creates positive sentiments towards the stock of that company. In such cases, the stock price moves higher, here you should book some profits to take the advantage of company-specific news and enjoy some profit booking in the stock.
Sector-related News: Apart from company-specific news, industry or sector-related news also comes into the market, like favourable government policy towards a particular sector that also influences the stock price of all the companies in that sector. Here you should book some profits if any such sector-specific related news comes into the market.
Economy-related News: Apart from company and sector-related news, economy-related news also comes into the market that influences the entire stock market. GDP Data, Industrial Production, Inflation, Unemployment and Purchasing Manager Index are the leading economy-related data that come from time affecting the stock market movement.
Here, with the positive news coming into the market most of the stocks also moves higher, and you can book the profits at every move. Economy-related news can affect the entire stock market, hence, not only your stock but shares of different companies from different sectors all keep moving in the same direction as per the positive and negative news.
Profit Booking Indicator
To know the right timing of profit booking, apart from fundamental factors also use the technical indicators like Support & Resistance, Chart Patterns, Moving Averages, Volume, RSI, Bollinger Band, Fibonacci Retracement, Swing Trading and Open Interest in F&O stocks.
Intraday trading is done mainly with the help of technical analysis and above mentioned technical analysis tools and techniques act as the best indicators for traders to know the buying, selling and profit booking levels to earn maximum gains.
Using these technical indicators you can check the momentum of stock and if found there is no room for further momentum you can book profits. Similarly, if you have expected a certain target while buying the stock and now the target is achieved, book the profit now and exit from your long position or cover your trade if created a short-selling position.
Similarly, you can use liquidity as one of the important factors to book profits in your trade. When institutional traders like FIIs and DIIs slowdown in money flow, then liquidity in the market is tightening and it’s time to book some profits.
Likewise, the central bank’s (RBI’s) monetary policy to control the liquidity in the market also affect the stock market movement. RBI can increase the interest rates to control such liquidity of money into the market, which also discourages investors institutional investors like banks, NBFC and financial institutions start pulling money from the market too.
And this kind of approach churns out the liquidity from the market, resulting there is no possibility of significant movement in the market of course individual stocks too. Here you should keep an eye on such activities and book profits in your trade.
Profit Booking Rules
Though there are no specific rules for profit booking in the stock market, different types of traders have their criteria and rules to trade in the stock market and book profits. But there are certain rules every trader should follow while trading in the stock market and book some profits from time to time to keep their trading strategy profitable.
When your target is achieved in that particular stock you should book the profits. However, if you think there is positive momentum in the stock and it is likely to move further, you can book the partial profits from your investment and fully later on.
Some traders during intraday trading have rules for booking the profits if their stock is giving them a certain percentage of returns which may be 2%, 5% or anything beyond that depending on their risk-bearing capability and cost of investment. You can also follow this rule to expect a certain fixed percentage of returns and book the profits.
Apart from these two, keeping an eye on the volatility of the market and booking the profits accordingly is another rule you should follow while trading in the stock market. When the market is volatile the risk is also high and if you are getting some returns you should immediately exit from your position and book some profits to make investment profitable at the end.
Profit Booking Strategy in Share Market
Following the rules means is not that you get assured profits, sometimes it might cost you more than your investment. You should make the right profit booking strategy to make sure you at least earn some amount of money from the trading in stock market.
The profit booking strategy for short-term or intraday traders is different from that of long-term investors. Hence, you need to understand the best profit booking strategy suitable for both types of players trading or investing in the stock market.
Profit Booking Strategy for Short-term Trading:
Reshuffling Your Portfolio: If your portfolio consists of equities, bonds, fixed deposits and billions with a 25% share in each category, you should keep this proportion maintained by reshuffling your portfolio from time to time. If your equities gained and reached somewhere around 50% of the total portfolio, then you can book profits in half of your total equities and invest or put this money into other assets in your portfolio as per their proportion all are divided.
Profit to Take Out your Cost: Suppose you have invested Rs 10,000 in equities, and after 2 years it is doubled or Reach at Rs 20,000, here you can book profits in 50% of equities to take out the cost of investment and keep the remaining quantities as residual profit in the socks to keep them going that can give you more profits in upcoming years. And this strategy is also applicable for intraday trading, future and options trading and short-term trading.
Book Profits on Target Achieved: If your target is achieved in a stock and you are earning significant amount returns, you should book the profits and exit from the trade. Here, before making positions you should take the help of technical analysis and create a target where you have to book profits and once the target is achieved exit from the position.
Time Horizon-based Profit Booking: If your time horizon is for day trading then you have to book profits to maintain the margins to avoid the penalty, especially if the stock is moving in the wrong direction and the time value of money is eroding in options trading. Traders in F&O Strategies have to square off their positions before the date of expiry, whether they are getting the profits or not. Hence, in such trades, you should book profits timely to avoid major losses.
Profit Booking Strategy for Long-term Investors:
For long-term investors rather than technical tools, fundamental factors are more important to book profits. The time horizon of long-term investing is more than 3 years or maybe 5 or 7 and 10 years, so with temporary stock market fluctuations, they should not be influenced unless there is any news affecting the economy, sector or company.
Watch Economic Indicators: GDP data, inflation, PMI, RBI policy, industrial growth and employment data are the leading economic indicators that should be considered by long-term investors while booking the profits into their investment. If any negative data comes up that can affect the stock market movement you should book some profits from your investment and wait for a few days when the market comes down again buy stocks in your portfolio.
Industry or Sectors Related News: Long-term profit booking strategy is mainly based on fundamental factors, and if there is negative news in a sector or industry, and the stocks of the same sector will come down, here you should also book some profits and make your investment worthwhile. Therefore, always diversify your investment into different sectors.
Book Profits on Company-Related News: When you see company-related negative news likely to come and you have the stock of that company, you should book profits and exit from such investments. Suppose the company has announced a corporate action or its quarterly financial results that were not as per the expectations, then the stock will come down. Here, go with a profit booking strategy to avoid short-term losses and make your long—term investment profitable.
Profit booking is the art of making your short-term trade or long-term investment profitable in minimum time with maximum gains. Profit booking is important to liquidate your investment and reshuffle your portfolio, ether it is part of a fully booked.
And as per the stock market trading rules, when your target is achieved or if you have earned certain percentages of profits then you should book profits and exit from your investment. Though, for intraday trading and long-term investment, there are different strategies and approaches to profit booking but ultimately in both situations, they earn money.
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