As a trader or an investor, they should know about right time to enter a stock and with that the right time to exit a stock. From this article on “What is the Right Time to Exit a Stock?” will be a in detailed article with complete solutions of why.
Once, you buy any securities or stock in the stock market there are numerous of thoughts strikes in one’s mind. Likewise, I will solve all the thoughts that occur in individual’s mind.
Signs that Signal Its Time To Exit a Stock
Defining a clear market exit strategy should be paid as much attention if not more than the research you put in while evaluating a company to invest.
Nothing can quite strongly reflect the importance of having a solid exit strategy than Abhimanyu’s fall in Mahabharat. A brilliant warrior prince and son of the master archer, Arjun, he managed to break into a very difficult defense formation, called a chakravyuh, but suffered a terrible fate due to his inability to exit it.
While this example may seem a bit extreme in comparison, a retail investor who doesn’t have a well-defined stock exit strategy may incur heavy losses in the market too.
There are many examples that shows the value of exit to be done in appropriate timing.
Also Check: Entry and Exits Rules in Intraday Trading
Fundamentals of a Company Are Changing
It’s time to say bye-bye to even if the stock has been your favorite when the fundamentals of the company are being compromised.
How do you know if the fundamentals are changing?
Look out for the quarter on the quarter results of the company.
If you see there has been a delay in reporting of growth numbers of the company is showing sustained under performance, then it is time to sit up and take notice.
However, check for at least 3-4 quarters to take a call here.
Also, check if the utilization of capacity is going down or if the non-performing assets (for banks and other financial institutions) going up.
Debt is also an important indicator of a company’s future.
Most of the stocks that went on to become multi-beggars belonged to organizations that had zero to negligible debt.
(Does not apply to NBFCs and Banks).
Take a look at the debt-to market cap ratio.
It is a way to measure the debt against a company’s ability to raise capital. Consequently, the lesser the number, the more stable a company is. However, if you see this number has increased and shows no sign of coming down, it is time for you to move out.
Corporate Governance Issues
Corporate governance issues should never be brushed under the carpet.
Corporate governance talks about you how well a company manages stakeholder relations.
The board of directors and the upper management must take actions that are in the best interests of internal and external shareholders such as employees, customers, partners, and must have no conflicts or legal disputes with suppliers, banks and other regulatory authorities.
The business should be conducted in a fair and ethical manner keeping in mind the industry’s best practices.
As an investor, look for their disclosure policy, the executive compensation policy, dividend policies, conflict resolution framework between various internal and external shareholders.
This information is disclosed when the company is publicly listed.
It is also important to note how well and how fast the upper management handles these setbacks.
If there has been a legal dispute which hasn’t been resolved or if the company is caught in regulatory trouble or you see the hasty exit of senior business leaders, the negative impact is pretty significant and will see a dip in scrip price. Usually, even after clarifications from the upper management, rarely does a company command the same level of respect and acceptance from the investor community.
Of course, this also depends on the kind of damage.
Retail investors often commit the mistake of ignoring issues around corporate governance and sincerely hope for price re-surge. This is an important factor to consider in your stock market exit strategy. Investors who are emotionally attached to the company may even take it as an opportunity to buy more shares in hopes of future rewards.
However, such events severely dent the reputation of the company as well as negatively affect investor sentiments. When the fundamentals of a company are compromised it is quite difficult to bounce back. If you see a company default on the fundamental parameters, it is time to book profits.
From this article on “What is the right time to exit a stock?” provides all the insight of the aspects for exiting a stock. With this, the topic comes to a conclusion that you need to pay attention when there is any loop-hole you find in order to overcome the losses.
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