When To Sell/Exit a position in Stock

When To Sell/Exit a position in Stock

Most retail investors follow suit as the #fiis continue to sell off in the Indian equities markets. Though FIIs have reasons to sell, r𝐞𝐭𝐚𝐢𝐥 𝐢𝐧𝐯𝐞𝐬𝐭𝐨𝐫𝐬 𝐬𝐡𝐨𝐮𝐥𝐝 𝐬𝐞𝐥𝐥 𝐚 𝐬𝐭𝐨𝐜𝐤 𝐨𝐧𝐥𝐲 𝐰𝐡𝐞𝐧 𝐭𝐡𝐞𝐲 𝐟𝐞𝐞𝐥 𝐭𝐡𝐞𝐢𝐫 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐡𝐚𝐬 𝐫𝐞𝐚𝐜𝐡𝐞𝐝 𝐢𝐭𝐬 𝐞𝐱𝐩𝐞𝐜𝐭𝐞𝐝 𝐯𝐚𝐥𝐮𝐞; 𝐭𝐡𝐞𝐲 𝐡𝐚𝐯𝐞 𝐛𝐞𝐭𝐭𝐞𝐫 𝐨𝐩𝐩𝐨𝐫𝐭𝐮𝐧𝐢𝐭𝐢𝐞𝐬 𝐭𝐨 𝐢𝐧𝐯𝐞𝐬𝐭, 𝐨𝐫 𝐭𝐡𝐞𝐢𝐫 𝐬𝐭𝐨𝐜𝐤 𝐞𝐱𝐩𝐞𝐜𝐭𝐚𝐭𝐢𝐨𝐧𝐬 𝐡𝐚𝐯𝐞 𝐜𝐡𝐚𝐧𝐠𝐞𝐝 𝐧𝐞𝐠𝐚𝐭𝐢𝐯𝐞𝐥𝐲.

A good stock picker does three things very well:

1)When to buy a stock

2)When to sell a stock

3)Defer taxes

For instance, a retail investor bought Infosys stock in June 2020 for 748/share. The cost of equity for Infy is 9%.

In June 2021, Infy’s stock price = 1446.9, giving an excess return of 84%. Despite Infy trading at 52 week low, the excess return is 27.2%.

If a retail investor sells Infy stock because of negative sentiment, he has to pay an LTCG of 10% or 63.93. When the retail investors reinvest these proceeds (1387-748-63.93=575.37) by buying another stock, it has to get an expected return of ~18% (9% cost of equity + 8.5% LTCG), which is difficult in this environment.

Thus, in my view, it is 𝙗𝙚𝙩𝙩𝙚𝙧 𝙩𝙤 𝙝𝙤𝙡𝙙 𝙚𝙭𝙞𝙨𝙩𝙞𝙣𝙜 𝙨𝙩𝙤𝙘𝙠 𝙩𝙝𝙖𝙣 𝙨𝙚𝙡𝙡 𝙞𝙩 𝙞𝙣 𝙛𝙖𝙫𝙤𝙪𝙧 𝙤𝙛 𝙗𝙪𝙮𝙞𝙣𝙜 𝙖𝙣𝙤𝙩𝙝𝙚𝙧 𝙨𝙩𝙤𝙘𝙠 𝙪𝙣𝙡𝙚𝙨𝙨 𝙩𝙝𝙚 𝙚𝙭𝙥𝙚𝙘𝙩𝙚𝙙 𝙧𝙚𝙩𝙪𝙧𝙣𝙨 𝙞𝙣 𝙞𝙣𝙫𝙚𝙨𝙩𝙞𝙣𝙜 𝙞𝙣 𝙣𝙚𝙬 𝙨𝙩𝙤𝙘𝙠 𝙚𝙭𝙘𝙚𝙚𝙙 𝙩𝙝𝙚 𝙘𝙤𝙨𝙩 𝙤𝙛 𝙚𝙦𝙪𝙞𝙩𝙮 𝙖𝙣𝙙 𝙇𝙏𝘾𝙂.