Making profits on your investment is as important as making the investments. If you have been investing in the stock market for some time, then you must have realized that ‘Profit Booking’ is one of the many reasons why the market falls. It is because profit booking is known to many people who indulge in the share market. Profit booking is not limited to equity shares but is also common in mutual funds and intraday trading.
With this article, we are going to elaborate on the concept of profit booking and have a closer look at it.
What is Profit Booking?
Profit booking is a terminology given to the scenario when a company or individual decides to liquidate their investments or holdings for realized gains. As the name suggests, it is booking profits from selling your holdings. It allows you to secure your profits to make real wealth. Generally, when a stock rise in value, the wealth created is nothing but nominal because the value can fluctuate, unless you cash out. When you cash out, the value of your holdings does not fluctuate.
The reason why the market falls from profit-booking is that when it is done, the money flows out of the share market. Investors liquidate their assets for the realized gains. So, when a lot of people involve themselves in profit booking, the money outflows and shares inflows in the market. This is what creates a slump, which results in the falling value of shares. However, it is not permanent and shares come back to normal after a few days.
Situations when Profit Booking Becomes Important
• Whenever there is any positive company-specific news in the market like good quarterly results, new product launches, or any business expansion, then it usually creates a positive sentiment in the market, lead to the rise in the value of the company’s stock in the market. When that happens, many businesses, individuals, and entities buy the shares of that company, which eventually raise the share price. When the share price is on the higher side, an investor who is invested in the company’s stock may be able to meet the investment goal by selling the stock.
• Sector-specific news also has a positive impact on the companies related to that sector. If RBI makes a positive announcement on a sector, the market immediately factored in the rise in growth and its positive impact on the market valuations. This sometimes leads to sharp rallies. You can take advantage of such uncertain sustainability and book profits out of your investment.
• Economic indicators have always been a great influencer of market movement. Many economic indicators are vital to deciding the movement of the market. Investors can gain or lose confidence based on the economic data. If the economic data is positive, then it is your cue to book profit. This is what helps you to avoid the market sentiment due to weak economic data in the present or future and secure your profits.
• Profit booking is also quite important when it comes to rebalancing your investment portfolio. Generally, the ratio that we decide at the time of asset allocation changes with the market movement. And, the portfolio requires rebalancing. Profit booking is your way to book profits to liquidates your excess investments and set your assets based on initial asset allocation.
However, it is equally important to book profits promptly. Also, investors must always remain informed and perform in-depth research before carrying out the profit booking.
