If you closely monitor the stock market, then you may have heard the news most of the times that the market has fallen because of the profit booking. Many people, particularly the first time investors may be alien to this term. In this article, we will try to dig out the prominent concepts of profit booking.
Profit booking is one of the ways through which many traders/investors secure their profits by booking the stock price at their trades. For Instance, let’s say you hold the 200 shares of Company ABC at an average price of Rs 100. The current market price of the share is Rs 120. You sell the shares at the present market price at Rs 120. Hence, you have booked or locked the profit with a realization of Rs 20 per share. Let’s reverse the situation, suppose you sell the shares of Company ABC at the ongoing current market price Rs 100, but after a few days the share price decreases by Rs 60. When you buy the same shares at Rs 60, then you have made a profit of Rs 40.
Why Book Profits in the Stock Market?
Below are some of the situations that may lead investors to book profits in the stock market:
- Company News: A positive news about the company can lead to profit Suppose, a company has received significant funding to launch new products. This news may create a positive sentiment in the market and many investors will start buying the stocks. Excessive buying may lead to a situation of share price rise. As a result, the investors are able to meet their investment targets and lead them to sell their stocks. Excessive selling may lead to a short-term decrease in the stock market caused by profit booking.
- Economic Data: It can also lead to a situation of profit booking. If according to the data, the future economic outlook of a country is not good or positive, then the investors start selling their stocks at the present stock price prevailing in the market to lock their gains and prevent themselves from any further loss.
The Closing Words…
It cannot be denied that the main objective of an investor is to get the full return on his investment. It is important that an investor must keep a close eye on the trends and make sure he takes a buy or sell decision when the right opportunity arises. That is only possible if you make the profit booking at the right time.